Late last month, venture capital firms Andreessen Horowitz and Union Square Ventures (USV) reportedly met with officials from the SEC's Division of Corporation Finance to discuss potential regulatory exemptions for innovations related to blockchain and cryptocurrency.
Andreessen was represented by managing partner Scott Kupor and general counsel Ryan Ward, while USV was represented by partners Brad Burnham and John Buttrick, according to the Wall Street Journal. Lawyers from Perkins Coie LLP, Cooley LLP, and McDermott Will & Emery LLP also attended the March 28 meeting, in addition to a lobbyist from the National Venture Capital Association.
On Twitter, the New York Times' Nathaniel Popper said that the firms apparently argued for a "safe harbor," essentially a measure of legal immunity while the fledgling blockchain and cryptocurrency industry tests its wings.
Per the Journal, the firms sought "formal assurance" that their projects would not be subject to SEC regulation. The group suggested that the digital tokens associated with their companies are not investments, but rather products in and of themselves. These categories are more commonly referred to as security (or investment) tokens and utility tokens. This is a crucial distinction because security tokens (as investment products) would require financial disclosures and detailed business descriptions, whereas utility tokens would carry no such standards. Regardless, it's important to realize that these digital assets (whether they be security tokens or utility tokens) are frequently designed and promoted for use on platforms that are still under development.
The firms may have been concerned by recent regulatory rumblings, including SEC chairman Jay Clayton's February testimony before the Senate Committee on Banking, Housing, and Urban Affairs. At that hearing, Clayton declared, "To the extent that digital assets are securities – and I believe every ICO I've seen is a security – we have jurisdiction and our federal securities laws apply."
The fierce debate about whether virtual tokens are securities, commodities, or something else altogether has enlivened cryptocurrency stakeholders and regulators. As has been noted by CFTC Commissioner Brian Quintenz, it's possible that digital tokens could even 'transform' from securities into commodities at some point.
Predicting the developmental path for the blockchain and cryptocurrency industry is immensely difficult, and that makes regulating the emerging sector akin to driving a car while someone else is still building the vehicle. That said, the SEC has brought a number of cases against blatant fraudsters in the cryptocurrency markets as well as against ICOs that clearly fall under the scope of securities law (e.g., Munchee). Likewise, the CFTC has pursued cases that seem to fall under its remit (with the understanding that virtual currencies like bitcoin are commodities).
The venture capitalist/SEC gathering took place shortly after the US Government Accountability Office published a 132-page report, which found that distributed ledger technology remains in its infancy, and complex regulation threatens to stifle advancements. Of course, both Andreessen and USV have significant financial interests in a multitude of blockchain and cryptocurrency-linked companies. These include Coinbase (which recently acquired Earn), CryptoKitties, Protocol Labs (creators of Filecoin), Polychain Capital, and DFINITY, among others.
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