Today the SEC announced a settled enforcement action against the very rustically-named BarnBridge DAO. In its announcement, it said:

The Securities and Exchange Commission today announced that BarnBridge DAO, a purportedly decentralized autonomous organization, and its two founders, Tyler Ward and Troy Murray, will pay more than $1.7 million to settle charges that they failed to register BarnBridge’s offer and sale of structured crypto asset securities known as SMART Yield bonds. The Commission also charged the respondents with violations stemming from operating BarnBridge’s SMART Yield pools as unregistered investment companies. To settle the SEC’s charges, BarnBridge agreed to disgorge nearly $1.5 million of proceeds from the sales, and Ward and Murray each agreed to pay a $125,000 civil penalties

This echoes written remarks by crypto industry bête noire and U.S. Securities and Exchange Commission Chair Gary Gensler last week, denying Coinbase’s petition for rulemaking, stating that

“as the marketplace for crypto asset securities develops, Commission staff continue to engage with crypto asset market participants, including by providing staff guidance regarding crypto asset securities and non-security crypto assets.

Barnbridge DAO and Coinbase have nothing to do with each other. Yet, here we see the agency use the term “crypto-asset security” propagandistically to try to link these two matters in the minds of the public, as if the SEC’s position in either piece of litigation is somehow related.

It’s not. BarnBridge was an illegal securities scheme executed on a cryptoledger which would be completely illegal virtually anywhere in the developed world. Coinbase, on the other hand, runs a legitimate business which allows people to buy and sell spot crypto, something which is perfectly legal in most of the developed world.

These are not related activities and they shouldn’t be described with the same terminology.

The use of “crypto asset security” is doubly inappropriate when we consider that the term has no legal meaning, and the main criticism of the SEC by the crypto industry is that it shouldn’t be treating crypto like securities in the first place – regulatory treatment which is increasingly at odds with the rest of the world. The term is not found in the statutes and it is not found in the court precedents. It is an invented term by the SEC to cover the agency’s ass, designed to link the agency’s (legitimate, popular, necessary) consumer protection function with its (aggressive, unpopular, unprecedented) effort to try to outlaw an entire class of consumer goods in the United States, chiefly, tokens.

The term needs to go.

Some backstory is warranted. During the height of the 2017-18 ICO boom, after the DAO Report and before the first enforcement actions, the question of whether, when, and how the United States would seek to enforce its securities laws in the cryptocurrency space remained, for the most part, theoretical. Among practicing attorneys, there were two camps. It was the author’s observation that attorneys over the age of 40, or not directly in the employ of cryptocurrency companies, tended to adopt the view that cryptocoin ICOs were “investment contracts” per Howey and, accordingly, that consequences for issuing those tokens without a registration statement being in effect, or listing those tokens on crypto exchanges, should follow. This view was reinforced by the pronouncements of then-SEC Chair Jay Clayton, who claimed in Senate hearings and television appearances that “every ICO [he’d] seen”[1] was a security. Clayton’s earlier remarks were recently echoed by SEC Chair Gensler, who quipped that while “Congress could have said in 1933 or 1934 that securities laws applied only to stocks and bonds… Congress included a long list of 30-plus items in the definition of a security, including the term ‘investment contract’… These laws have been on the books for decades.”[2]

In the other camp, a number of law firms publicly advanced the theory, often in law review-length papers, that cryptocurrency tokens on completed networks should be treated as consumptive and thus not satisfying the “expectations of profits” limb of the Howey test, per precedents such as Forman.[3]  This view was, confusingly, reinforced by a speech by then-Director of the Corporation Finance Division of the SEC Bill Hinman in May of 2018, which has come to be known by practitioners simply as the “Hinman Speech,”. During this speech, Hinman further confused the matter by pronouncing , sans precedent, that “[i]f the network on which the token or coin is to function is sufficiently decentralized – where purchasers could no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.”[4]  

Legally, and retrospectively, it seems likely the “utility coin” argument was wrong and the “it’s a security under Howey” argument was right. Prospectively, the question we should be interested in is whether the legal situation in the U.S. ought to be the case.

This is particularly so given that other countries like the United Kingdom have charted a different regulatory approach than the United States which doesn’t treat crypto-assets identically to securities, gives them their own regulatory regime, and more or less lets the spot crypto markets exist as long as there’s a modicum of consumer protection and AML/CTF regulations are complied with (i.e. the position the United States took with regard to its exchanges prior to 2023). Hell, the UK even had the stones to define cryptoassets by statute and – guess what! – the definition is not coextensive with the UK’s old or new definitions of a “transferable security.” Fixing Howey isn’t hard.

In my opinion, the legal case for regulating cryptoassets separately from investment contracts is about to get considerably stronger due to rapid technological change. As I wrote a few weeks ago in my post about my crypto-AI thesis, crypto might have looked like an investment security in 2009 or 2014 because it lacked product-market fit. Going forward, as we see an increase in AI-generated content and the need for cryptographically secure authentication and proof-of-human increases, it is likely that cryptocurrency will play an important role in these authentication systems – as, at least as far as we know, bruteforcing a private key is not a power that an AI is going to have for the foreseeable future.

The U.S. Congress is so dysfunctional that to say the U.S. crypto industry has a long road ahead of it to get the Securities Act of 1933 updated with the times would be a monumental understatement. Tons of work needs to be done, both from a PR perspective and a user friendliness perspective, to change the public perception of crypto as a zany version of the Pink Sheets for nerds into a necessary part of living in a digital world.

Today’s lesson is that the use of language is an important part of crafting that public perception. Every time we adopt the SEC’s “crypto asset securities” terminology, we are implicitly acknowledging the correctness and the appropriateness of a 90-year-old regulatory scheme for paper investments from the era of telegrams and morse code for distributed cryptosystems that settle transactions worth billions, from opposite sides of the world, in a fraction of a second, from any technology capable of broadcasting a digital signature, whether it be a ham radio, a computer, or a handheld phone.

Is it possible to issue a security on a cryptoledger, as the Barnbridge DAO guys appeared to do? Sure. Does that mean we need to conflate that asset, a security, with every single other cryptoasset which is routinely traded on the spot crypto markets by millions of people, for the sake of defending an indefensible and overbroad American regulatory regime which is at odds with consumer demand and the rest of the world? Absolutely not.

There is no such thing as a “crypto-asset security.” There are cryptoassets, and there are securities. The United Kingdom can tell the difference. Why can’t America?

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[1] Stan Higgins, SEC Chief Clayton: “Every ICO I’ve Seen Is a Security” (February 6, 2018),CoinDesk, https://www.coindesk.com/markets/2018/02/06/sec-chief-clayton-every-ico-ive-seen-is-a-security/

[2] Gary Gensler, Chair, Testimony of Chair Gary Gensler, Before the United States House of Representatives Committee on Financial Services, Sept. 27, 2023.

[3] United Housing Foundation v. Forman, 421 U.S. 837, 854-55

[4] William Hinman, Digital Asset Transactions: When Howey Met Gary (Plastic) (Speech, June 14, 2018), https://www.sec.gov/news/speech/speech-hinman-061418