Time for a safe harbor?
In the midst of the Senate Select Committee's final submissions and ASIC's consultation on crypto-asset exchange traded products, it is clear that discussions continue to help develop a 'light touch' and appropriate legal framework for digital assets in Australia.
However, how do FinTechs and Blockchain businesses go about developing new offerings while that occurs?
There appears to be increasing support for a "safe harbor" approach. Safe harbors are regulatory provisions which specify that if an individual or entity undertakes specific conduct they will be deemed not to have violated specific rules. It is commonly accepted that the guidance on, and absence of rules and regulations regarding digital assets do not provide sufficient clarity for those wishing to harness blockchain technologies, increasingly leading to businesses leaving Australia for jurisdictions which are welcoming of these technologies.
This has been recognised by the Senate Select Committee's inquiry and ASIC's recent consultation on crypto-assets. A safe harbor, however, could set standards of conduct which allow innovation to flourish Down Under while regulators take a considered and measured approach to tailored regulation.
The US Securities and Exchange Commission (SEC) has already started. In April of this year Commissioner Hester M. Peirce of the US SEC released a 'Token Safe Harbor Proposal 2.0'. This is intended to:
provide network developers with a three-year grace period within which, under certain conditions, they can facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws.
Pursuant to the safe harbor proposal Wyoming has reportedly approved the first legally recognised DAO in the US, the 'American Cryptofed DAO'. This clearly shows how innovative approaches to digital assets can, and have, develop successfully under a safe harbor.
The safe harbor does not provide 'a free pass' for digital asset projects but can instil a variety of requirements for regulatory comfort. For example, the SEC approach requires:
semi-annual updates to the plan of development disclosure and a block explorer;
an exit report requirement with either:
an analysis by outside counsel explaining why the network is decentralized or functional; or
an announcement that the tokens will be registered under the Securities Exchange Act of 1934.
The key benefits of a safe harbor include the flexibility to endorse attributes that bring regulatory comfort and immediate clarity and safety to an area of law which was designed long before blockchain technology and crypto-tokens were invented. The area of digital asset law rightfully requires a considered approach which cannot necessarily be done with the speed at which innovation runs. We hope that such a safe harbor will be considered in Australia to potentially assist those locally in the digital asset space and attract international investment with smoother sailing.