Tokenization of Infrastructure: Navigating Regulatory Landscape in the United States

Tokenization of infrastructure, an emerging technological solution, holds promises of efficiency, liquidity, and accessibility.

However, its implementation is intricately tied to regulatory frameworks, both at the federal and state levels, in the United States. Understanding these regulations is crucial for businesses and investors venturing into this space.

State vs. Federal Legislation

In 2019, a significant number of states, 28 to be precise, introduced legislation pertaining to blockchain technology. While 27 bills and resolutions were enacted and adopted, it’s essential to recognize that state-level regulations might not hold sway at the federal level. Laws in some states exclusively affect their jurisdictions, posing challenges for nationwide implementation and compliance.

Regulatory Limitations and Securities Law

The tokenization process often encounters regulatory limitations, leading to a nuanced approach in structuring token offerings. Instead of tokenizing the ownership rights of the underlying asset, the equity of the special purpose vehicle (SPV) that owns the infrastructure project is commonly tokenized. This strategic maneuver aims to navigate the broad definition of “security” encompassed by federal securities laws, including stocks, bonds, and investment contracts.

The U.S. Securities and Exchange Commission (SEC) plays a pivotal role in regulating token offerings. It introduced a framework in 2019 to determine whether a digital asset qualifies as a security under federal laws. Referred to as the “Howey Test,” this evaluation considers factors like investment of money, common enterprise, expectation of profits, and reliance on the efforts of others.

Compliance and Regulatory Frameworks

Compliance with SEC regulations is paramount for token offerings. Tokens that qualify as securities must either register with the SEC or meet specific conditions for exemption under regulations such as Regulation A+, Regulation CF, Regulation D, or Regulation S. Failure to comply can result in severe civil penalties and investor recourse.

In response to the evolving landscape, the SEC proposed Rule 195 in 2020, offering a safe harbor period of three years for tokens to achieve sufficient decentralization, potentially exempting them from being classified as securities.

Broker-Dealer Custody and Regulatory Clarity

In addressing custody concerns, the SEC issued a statement in 2020 regarding the custody of digital securities by special purpose broker-dealers. This statement provides guidelines for broker-dealers to operate within certain parameters, ensuring compliance with SEC regulations and mitigating associated risks.

Additionally, regulatory bodies like the Commodity Futures Trading Commission (CFTC) and the Office of the Comptroller of the Currency (OCC) have taken steps to foster responsible innovation in digital assets. The CFTC announced plans to develop a holistic framework for digital asset innovation, while the OCC permitted national banks to provide banking services to cryptocurrency businesses, emphasizing risk management and compliance with anti-money laundering (AML) and Bank Secrecy Act (BSA) provisions.

Conclusion

Navigating the regulatory landscape surrounding tokenization of infrastructure in the United States requires a comprehensive understanding of federal and state laws, SEC regulations, and evolving frameworks set forth by regulatory bodies. As technological advancements continue to reshape traditional financial models, stakeholders must remain vigilant and adaptable to ensure compliance and foster responsible innovation in this burgeoning field.