In early April, the Securities and Exchange Commission issued its first "no-action" letter regarding business use of blockchain-based digital assets. The letter was in response to a proposal from an air charter provider looking to launch a blockchain-based token platform to facilitate sales for air charter services. While the SEC’s response does offer some guidance, it outlines very restrictive conditions for the proposed program and is not particularly actionable for the broader business community.
First, the outlined requirements will limit the business’s ability to fully optimize its program. Further, the letter signals that additional similar proposals will meet the same type of resistance, which is likely to limit many business use cases for crypto-token products.
Specifically, the air charter company’s proposed program would provide users with a digital wallet to buy, broker and sell crypto-based tokens that could be used to book travel within the company’s network of aircraft fleets. In the no-action letter, the SEC agreed with the company’s proposal that the tokens do not qualify as securities. They also responded that the program could only be implemented within specific conditions, which include:
- Token-generated funds cannot be used to develop the company’s platform technology (such as its app).
- The tokens will be immediately useful.
- The tokens will remain at a fixed price of one U.S. dollar.
- The tokens can only be used for air charter services.
- Repurchases will only be made at a discount to the token.
- The company may not represent the tokens as having profit potential.
More standardized guidance on blockchain and crypto based programs is needed. In this instance, it’s notable that the SEC relied on the opinion of counsel to form its conditions. Corporations in similar situations, or those beginning to explore these types of programs must be prepared to face SEC scrutiny, and should carefully build their case for crypto-based programs. Do not rely on general information or the assumption that compliance with the conditions outlined in this matter’s no-action letter will be fully relevant to other new programs.
Instead, corporations should contact the SEC directly, and before release of a product, to gain specific input and approvals. This is far more likely to yield clear guidance and will help avoid any regulatory enforcement or repercussions that may come after a cryptocurrency project is launched.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.