In the ancient Greek tale of OEDIPU, great rewards for travelers were able to solve difficult puzzles, but a strong sphinx made up the riddles and devoured those who failed to solve them. Similarly in ancient cryptotids, around 2017, blockchain technology stood to revolutionize Finance and other fields. But two challenges stood in the way of this technology and enjoy its full potential: (1) Securities legislation that does not easily map decentralized systems, and (2) a securities regulator that is hostile to digital assets that often pose serious risks to those who tried to solve the first challenge.

Today, Sphinx has decided to be more useful but the puzzles remain. Securities and Exchange Commission’s (“Sec”) Crypto Task Force has stated that the agency’s former regime created “an environment hostile to innovation” and has committed to collaborating with industry participants to create sensible rules. While promising, there are still significant challenges. US securities laws are a mixture of statutes adopted by Congress and rules adopted by SEC. Task Force has signaled SEC’s willingness to make the latter more useful through new rules and exceptions. However, the statutes make up most of the challenges, and only Congress, not sec, can change them.

Below is a primer of the more common puzzles that are currently facing developers of tokenized securities.

Legislative considerations

For tokenized securities, the developer creates on-chain tokens, each representing a share of equity in a company or other security, or another asset that offers the right to cash flows. This tokenization can open the possibilities – such as immediate settlement, sharing fractionation and daily yield payments – which makes the product more efficient or functionally different than its tradition.

Although SEC may be more susceptible to ideas for tokenized securities, it does not have the authority to change the statutes. Tokenized securities projects will therefore still need to resolve or avoid the riddles these statutes present.

The investment company

If a token gives its owner financial exposure to assets that the developer has collected, the token project may be an investment company covered by the investment company that regulates companies that mutual funds investing in securities and allowing investors to get exposure to the investments through shares they are issuing.

This one went existed well before crypto, and most people chose to navigate it by avoiding being classified as an investment company in the first place. This is because the requirements set under the law of the investment company do not work well with business models involving more than buying and selling securities. There are significant restrictions on debt and equity increases, borrowing and even business with affiliated companies. For those who are unable to avoid triggering these requirements, there are exceptions that may be available.

Broker dealers according to Securities Exchange Act

Anyone who buys and sells securities to others or is ready to buy and sell securities to their own account can be a broker or dealer. There is no lighting line rule to qualify as a broker, but the SEC and the courts consider indiciers, whether you provide liquidity, charge a fee related to the trading price, actively find investors or play a role in holding customer funds or securities.

Although there is no practical way to trade digital assets as a brokerage dealer at the moment, SEC could use its existing authority to map a realistic path to do so. In the best case, it will take time and still come up with some compliance obligations.

Exchanges according to Securities Exchange Act

While it may not be similar to a traditional securities in the event, a platform that uses smart contracts to collect orders for tokenized securities from multiple buyers and more sellers for matching and execution can qualify as one, depending on its structure.

Currently, only brokers dealers can trade with exchanges and stock exchanges cannot contain customer accounts or detention customer cavity papers. Even if SEC is able to rework these rules, some requirements would undoubtedly continue.

Security -based swaps under Securities Exchange Act

If a tokenized security gives its holder exposure to the financial performance of one or more securities, it may have surpassed the complicated world of security -based swaps. Generally tokens that provide the exchange of future payments based on the value of a security (or events relating to this security) without To communicate ownership rights is likely to be swaps. Security -based swaps are under the joint jurisdiction of SEC and Commodity Futures Trading Commission. The requirements for them are many where the most notable are rules that prohibit retail investors from buying swaps.

AML and KYC

Companies involved in trading or transferring tokenized securities also need to consider the applicability of anti-whitewashing money and known-your-customers laws. Compliance requirements depend on the role played in the transactions but may include the collection and verification of name, date of birth and address of customers.

The riddles need to be worked through, not around

Solving these riddles is not a goal in itself. When designing a tokenized securities project, developers make choices based on the economy, technology and the regulatory framework. These areas are intertwined as technology can make the economy possible and decide where a project is falling within the regulatory framework. But because these considerations are so interconnected, developers should analyze them holistically from the beginning. Leaving legislative considerations until the end can turn into a game of Jenga, where problematic parts are only removed to overturn the benefits and goals of the economy and technology. The riddles that make up today are not only obstacles to the many benefits of blockchain technology, but crucial parts of the answer.

The statements expressed in this article are (s) and do not necessarily reflect the views of the injury or its clients.