On the heels of the first-ever judicial holding this past summer that a cryptocurrency could qualify as a “security” under federal securities laws, the Securities and Exchange Commission has brought a wave of new enforcement actions targeting blockchain-based digital token ventures under a variety of provisions in the securities laws. These proceedings show the breadth of the approaches the SEC is taking toward enforcement in this area, perhaps most notably in one case where it appears a “smart contract” blockchain application may have proved to be a bit too smart for its own good.

Background

The SEC’s Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Exchange Act Rel. No. 81207 (July 25, 2017) (the DAO Report) set forth the SEC’s position that tokens (digital representations of assets or rights) issued on a blockchain platform, such as virtual currency sold in an Initial Coin Offering (ICO), may in appropriate circumstances be considered “securities” under the federal securities laws. The SEC based this position on the “Howey test,” the U.S. Supreme Court’s long-established test for determining whether certain transactions qualify as “investment contracts” and thus “securities” under SEC v. W.J. Howey Co., 328 U.S. 293 (1946), and its progeny, which looks to whether there is (1) an investment of money, (2) in a common enterprise and (3) with profits to be derived solely from the efforts of others.