A proposal for a grace period of three years to achieve decentralization was formally submitted by SEC Commissioner Hester Peirce. She proposed that the securities legislation should not be applied first on the new tokens. In this way, crypto start-ups and companies have three years to create a project according to the legal norms. This would give them enough time to develop their networks and communities before they have to worry about the regulatory regime.
Known by the nickname “CryptoMom” by the blockchain community, Peirce has been active in the SEC for two years. Throughout this period, she has been noted as the Commissioner with the most open attitude towards cryptocurrencies.
Three years to achieve decentralization
According to Peirce’s proposal, revealed in a speech at the Chicago International Blockchain Congress, on Thursday, crypto start-ups would have a grace period of three years from the first sale to reach sufficient decentralization. to go through SEC assessments, including Howey Test.
To date, the SEC has initiated enforcement actions against several companies that have created and sold tokens. These include large projects such as Telegram and Kik, two major messaging platforms.
In the notes detailing the proposal, Peirce states that the status of a token is evolving, so it requires a period of accommodation. In other words, some digital assets may appear to be securities at launch, but at maturity they are decentralized enough to no longer fit.
There are previous examples – Ethereum and EOS
SEC executives have already confirmed that certain tokens have evolved beyond the securities stage. These include Ethereum and EOS, which currently do not fit into this typology.
SEC President Jay Clayton and William Hinman, the director of the corporate department, have hinted that the ETH status has changed. Clayton said digital assets could go beyond investment contracts at some point. He didn’t mention Ethereum in particular, but Hinman named the project as an example.
A similar transition was also observed with EOS. The SEC concluded last year that although the original EOS ERC-20 token is a securitiy, the final EOS cryptocurrency is not. Users migrated from the ERC-20 token to a native version after the network was fully built.
“Applying federal securities laws to these projects frustrates the network’s ability to reach maturity and impedes the transformation of the token sold as security into a digital asset that no longer has this status,”
Peirce said in the notes detailing the proposal.
Hard rules for the grace period
Peirce’s three-year proposal for decentralization does not mean free hand for crypto-project initiators. They will have to adhere to strict rules regarding investor protection and how they plan their business.
The development team should disclose the “relevant name and experience, qualifications, attributes or skills” of each member. It should also mention how many tokens each one has and how much it earns through the founder’s rewards or similar programs.
You must also publish the source code of the project, the transaction history (and a description of how a person can independently search the transaction history). Information on the token economy, roadmap and history of previous token sales, disclosed on a free and public website, will be included.
The proposal would not apply to projects that are already operational, Peirce said. Its purpose is to focus on new projects in their initial stages of development.
Although the grace period proposal depends on the good intentions of the development team, the SEC will not leave them unattended. People with a history of fraud, for example, will not be able to benefit from protection.
“This provision regarding bad actors is not addressed to the teams that establish a plan for a network and work seriously towards building it, but fail to bring it to fruition. Rather, it is designed to ensure that the SEC can take action against a team that aims to deceive token buyers by misrepresenting or omitting key information, “
Peirce said.
“We all know that there are a lot of such” projects “that pollute the crypto space.”
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