Why the SEC’s no-action letter is a big deal for cryptocurrency
The decision throws open the door for more businesses to start exploring practical crypto applications.
Earlier this week the United States Securities and Exchange Commission (SEC) took a prominent step forward on questions of security tokens and utility tokens, by almost simultaneously issuing a new framework for investment contract analysis of digital assets, a separate statement on that framework and a response to a test case of sorts, in the form of a no-action letter to TurnKey Jet.
In other words, TurnKey Jet suggested that its token offering should not be considered as a typical security offering, because its tokens offer a strong level of utility and serve a real practical purpose as part of its product, and explicitly do not come with an expectation of profit.
The SEC then took a close look at that argument, and agreed with it. On the same day, it explained what it considered when making its decision there, and also released new guidelines to help projects issue tokens without falling afoul of securities laws.
So on the whole it was a very big day for digital asset regulation, and well worth looking at what went down in more detail.
In a letter dated 2 April, a representative of TurnKey Jet (TKJ) asked very nicely whether it could please launch a token sale without registering as a security offering. Without going into too much detail, TurnKey Jet is essentially what you get when you combine private jets with the sharing economy.
As it explained to the SEC, TKJ works by connecting three parties in one ecosystem:
- Flyers: The people who want to book an air taxi.
- Carriers: The owners and operators of the aircraft that flyers fly on.
- Brokers: The matchmakers between the flyers and the carriers.
TKJ wanted to sell tokens at a price of US$1 each, so these tokens could be used to pay for its services instead of real money. This is because existing payment systems are presenting a real pain for TKJ.
The goal is to let people find an available private jet for short notice travel on demand, but payment is tough. Credit cards can settle up instantly, but can come with fairly staggering transaction and currency exchange fees, especially for private jet-sized transactions. The other option is wire transfers, but these can take days to settle – and will often be entirely off limits on weekends – which really undermines that "on-demand" element of TKJ's business model.
The envisioned solution is for TKJ to hold an open-ended tokens sale with a fixed price of $1 per token. This lets people buy their expected amount of travel time in advance and keep enough sitting around to use for instant payment as needed. Think of it as a stablecoin that's pegged to $1 worth of air travel with a single provider.
True to stablecoin form, the funds from purchased tokens will be safely held in bank accounts, and there will always be at least $1 in the bank to cover outstanding TJK tokens. This ensures the value of TKJ tokens is better protected. If someone wants to ditch their tokens, they can sell them back to TKJ but only at less than the face value of each token. When someone redeems a TKJ token for air travel, the token is burnt.
Basically, all the money from the token sales will be going into a big pool of fiat safely held by TKJ's banks, and earning interest for it. Consumers who want to fly will throw their money into that pool and get digital vouchers in return. When they want to fly, they can instantly pay for it with those vouchers. The carriers and brokers then get paid in fiat from that pool at a later date.
In addition to just working better for customers, TKJ also says it can significantly cut administrative expenses.
While TKJ didn't reckon the token offering constituted a security sale, the ambiguous regulatory environment around cryptocurrency meant it wanted to be sure it wasn't unintentionally launching an illegal security sale.
The SEC response
The SEC's response to the enquity can be condensed as "alrighty". If TKJ performs the sale and operates its business as described in the request, the SEC won't bring down the hammer on it, it said.
According to the SEC, it reached this decision for reasons including:
- TKJ won't be using any funds from the token sale to develop its platform, network or app, and all of that will be fully developed before any tokens are sold. Indeed, TKJ said in its application that it's been profitably operating since 2012.
- Tokens will be immediately usable for their intended purpose (buying air charter services) when they are sold.
- The tokens will be restricted to use on the TKJ platform and the TKJ wallet only.
- The value of the token will be fixed at $1 worth of air charter services each, and it will remain the same throughout the life of the program.
- TKJ will only repurchase tokens at less than their face value, to really drive home the point that it's not an investment.
- The token will only be sold and marketed in a way that specifically emphasises its functionality, not the potential for resale.
These lessons can be applied to other token offerings, and are further reflected by the Framework for “Investment Contract” Analysis of Digital Assets report the SEC also issued.
This is a big deal because it means businesses now have a much clearer avenue for the sale and issuance of tokens as a practical and useful business tool, while cementing the fact that anyone who wants to issue a token for investment or fundraising purposes should probably be complying with appropriate security laws.
It's a significant step for the blockchain industry as a whole because it helps throw open the door for already-successful businesses to think about how they can benefit from blockchain technology and tokenisation.
And most of all, it's clear that TKJ tokens are for air travel only, not for holding as an investment in order to turn a profit.
That said, the cost of air travel is constantly falling. So assuming TKJ services get cheaper over time, wouldn't that mean the objective value of a set amount of TKJ tokens, as measured by how much air travel they can purchase, will be growing over time? Would that technically make it an appreciating investment? Value is a funny thing.
Disclosure: The author does not hold any cryptocurrencies at the time of writing.
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