On January 4, 2019, two Colorado senators introduced the “Colorado Digital Token Act,” a bill seeking to exempt digital tokens and cryptocurrencies from certain Colorado state securities laws. In filing the Colorado Digital Token Act, the senators proposed that digital tokens with a “primarily consumptive purpose” that are not marketed to be used for “speculative or investment purposes” should be exempt from certain state securities laws.
The overall purpose of the proposed Colorado Digital Token Act is to reduce the “regulatory uncertainty” regarding digital tokens and cryptocurrencies. In so doing, the bill hopes to benefit Colorado businesses that use crypto-economic systems to operate blockchain technology-based business models to obtain the growth capital they need to further develop such model. The proposed bill declares that it can ultimately promote the “formation and growth of local companies and the accompanying job creation…helping make Colorado a hub for companies that are building new forms of decentralized ‘Web 3.0’ platforms and applications.”
The proposed bill defines a “digital token” as a digital unit with specified characteristics, secured through a decentralized ledger or database, exchangeable for goods or services, and capable of being traded or transferred between persons without an intermediary or custodian of value. In addition, it defines a “consumptive purpose” that would exempt a digital token from securities laws as providing or receiving goods, services, or content, including access to goods, services, or content.
To be considered an exempt digital token under the proposed bill, either the consumptive purpose of the digital token must be available at the time of sale, or all of the following conditions must be met:
- the consumptive purpose of the digital token is available within 180 days after the sale or transfer of the digital token,
- the initial buyer must not resell or transfer the digital token until the consumptive purpose of the digital token is available, and
- the initial buyer must provide a knowing and clear acknowledgment that the initial buyer is purchasing the digital token with the primary intent to use it for a consumptive purpose.
Moreover, to qualify for the exemption, the issuer of the digital token and any person effecting the purchase, sale, or transfer of the digital token each must file a notice of intent with the securities commissioner of Colorado.
Similarly, Wyoming has indicated its support for the development of blockchain and digital tokens by enacting various new statutes, in particular, the “Utility Token Bill.” Under such legislation passed in March 2018, certain digital tokens are exempted from specified Wyoming state securities regulations if they are not marketed as investments and the token has a primarily consumptive purpose.
On the federal level, two members of the U.S. House of Representatives introduced the “Token Taxonomy Act” (H.R. 7356) on December 20, 2018, which, among other things, seeks to exclude “digital tokens” from the definition of a security under both the Securities Act of 1933 and the Securities Exchange Act of 1934. Perhaps most noteworthy, the digital tokens that the proposed bill excludes from the definition of a security are those that are not “a representation of a financial interest in a company, including an ownership or debt interest or revenue share.” The bill expired at the end of the 115th Congress and has not yet been re-introduced in the 116th Congress which began on January 3, 2019.
Taken together, these developments show how both state and federal lawmakers are considering crypto-friendly approaches in connection with digital tokens.