Not So Safe After All? SAFT May Increase Risk of Token Sale, New Report Argues
The SAFT protocol has been heralded by some as the newest form of self-regulation in the cryptocurrency market. But according to researchers at the Cardozo Blockchain Project, SAFTs may carry more legal risk than otherwise assumed.
The Simple Agreement for Future Tokens (SAFT) project aims to streamline investor accreditation and verification, but may actually create more legal burden from the perspective of securities law. In a 15-page report, the Cardozo Blockchain Project argues that SAFTs “could heighten the exuberance manifesting in markets for blockchain-based tokens and make it even more difficult to provide consumers access to potentially impactful new technology.”
That’s not to say that the researchers are necessarily opposed to the project; they just believe that it could have the opposite effect when it comes to consumer protection.
They go on to say that, “the SAFT Approach ultimately fails to deliver a simplified and binary compliant token sale framework as advertised. Tokens underlying a SAFT may be more likely to be deemed securities, thus potentially subjecting token sellers to significant legal or economic risks.”
Against this backdrop, the authors suggest that SAFTs would heighten the probability of token raises being labelled securities. Although this isn’t inherently bad, most ICO issuers don’t want to go down this path. After all, any token deemed a security is subject to federal oversight by the Securities and Exchange Commission (SEC). This could have a devastating impact on a token raise if regulators determine after the fact that it is indeed a security token.
A New Regulatory Approach?
As the debate over security tokens intensifies, the cryptocurrency community is looking for new ways to navigate the regulatory landscape. Token compliance platform iComplyICO recently published a whitepaper where it argues for a “systematized version of the Howey Test” to determine if a security token can be quantified from the perspective of validation and legal review. This protocol includes automated KYC and identity verification on both sides of the transaction.
Despite a lack of regulatory certainty, the blockchain community has attained several legal milestones in just a few years. According to iComplyICO, these include the Coinbase framework, the Howey Test, the SEC ruling on Slock.it and the Canadian Securities Administrators (CSA) ruling on cryptocurrency offerings.
The CSA notice, which was published in August, suggested that many token offerings fall under the definition of securities under Canadian law. As such, these projects must issue a prospectus before launching. The CSA also said these products may also have the characteristics of derivatives, which would subject them to derivatives laws.
This approach is consistent with the one taken by the SEC in the United States and regulators in Singapore.
As the regulatory issues get ironed out, it’s abundantly clear that the ICO market is still running hot. It remains to be seen whether SAFTs are the answer to an increasingly complex web of regulation or whether industry participants will create a new alternative to drive the market forward.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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