This post was originally published by Jake as an X thread.

"Is this token a security?" has always been the biggest regulatory issue for crypto in the USA. The SEC's top priority should be answering that question with a safe harbor for token issuance. Today, DeFi Education Fund (DEF) sent a letter to the SEC on how a new safe harbor could work.

As everyone in crypto knows, the federal securities laws don’t make any sense for tokens. Traditional securities laws create a life-or-death binary outcome for tokens: Either it's a commodity and totally fine, or it’s a security and can't function or trade onchain at all.

Even worse, the prior SEC refused to explain which tokens were which, or even how to apply the securities laws to crypto coherently and consistently. This failure left everyone guessing about securities compliance, in fear of enforcement, and incentivized to move offshore.

The SEC’s Crypto Task Force can fix this. Years ago, Hester Peirce — ahead of the curve like usual — proposed a safe harbor that would solve this problem by creating a new regulatory framework tailored to tokens intended to become decentralized. It's time to make it happen.

To help, DeFi Education Fund wrote to the SEC explaining five core principles that should guide its work in drafting a safe harbor.

FIRST, the safe harbor should be tech-agnostic. The SEC shouldn't pick winners and losers: it should create standards focused on risks, not technologies.

SECOND, the safe harbor should be available to a wide range of tokens. It should set forth eligibility criteria making it easy for tokens to "enter" the safe harbor, as long as the creator of the token:

• intends to decentralize, and

• is capable of satisfying the exit test.

THIRD, the safe harbor should impose compliance obligations that work for crypto. For example, it should require disclosures addressing information asymmetry between token creators and holders. It could also impose lockups on insiders, among other rules and restrictions.

FOURTH, the safe harbor should clearly define the criteria that tokens must satisfy to "exit" as non-securities. The exit test should focus on decentralization from the perspective of a lack of control related to the token, not a lack of ongoing efforts to bring value to it.

FIFTH, the safe harbor should extend protections to secondary markets. The safe harbor only works if it gives regulatory clarity to everyone involved, including the secondary market participants — exchanges, custodians, traders, users, etc. — who interact with the token.

In a perfect world, securities clarity would come from Congress in the form of market structure legislation, and hopefully some day soon it will. But until then, there is no single rulemaking effort more important for the SEC’s Crypto Task Force than a token safe harbor.

I am very proud to have worked with Amanda Tatums and DeFi Education Fund team on this letter. Our thanks to the many DeFi lawyers and policy experts, too many to name, who read drafts and gave us valuable feedback. Read it here and tell DEF what you think.

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