SEC and CFTC Update Crypto FAQs: Token Buybacks and Network Upgrades Not Automatically Securities

Huo Xing Finance reports that on September 25, the U.S. Securities and Exchange Commission’s Division of Corporation Finance released an updated FAQ clarifying that token buybacks, network upgrades, and marketing statements do not automatically render crypto assets as securities. SEC staff noted that announcing a buyback plan for an already-operating crypto network does not, by itself, cause the associated tokens to constitute an investment contract; however, if the network is not yet operational and the issuer promotes the buyback as a source of returns for holders, the situation may differ. The FAQ also clarifies that once a crypto system is operational, services provided to safeguard, maintain, improve, or enhance the system or its functionality, or to promote network effects, do not constitute managerial efforts under the Howey test. Marketing the existing uses of a network typically does not create an expectation of profit, and statements regarding future functionalities are likewise not considered to generate profit expectations, provided that profit potential is not promoted. The update reaffirms that conclusions will remain highly dependent on specific facts and are built upon the SEC’s interpretive release issued in March this year regarding the application of securities laws to crypto assets. On the same day, the Commodity Futures Trading Commission updated its crypto FAQ to permit futures firms and clearinghouses to invest client funds in tokenized versions of previously permitted assets, provided investment and custody requirements are met. CFTC staff also indicated that regulated firms may use blockchain for recordkeeping, but must still be able to provide records even if the blockchain or its block explorer is unavailable. These updates come as the CLARITY Act failed to advance in the Senate, with regulators continuing to advance the crypto regulatory framework under existing laws.