Blockchain Legal Resource

The latest state to confront the utility token issue, Colorado, recently enacted the Digital Token Act (the Act). The Act amends the provisions of the Colorado Securities Act that require the registration of all securities offerings in the state unless an exemption is available. Specifically, the Act provides a conditional exemption from registration for certain utility tokens qualifying as “digital tokens” that have a “consumptive purpose.” It also provides limited relief from broker-dealer registration for intermediaries effecting transactions in such digital tokens.

To date, virtual currency exchanges in the United States have structured their operations in an effort to avoid being required to register as an exchange with either the Securities and Exchange Commission or the Commodity Futures Trading Commission. While these efforts may be entirely legal, without the regulatory protections of exchange registration, they could create enhanced risks for customers, particularly in the case of a fund’s insolvency or collapse. A recent federal case highlights these risks and provides a roadmap for asserting personal jurisdiction over a virtual currency exchange.

As we have previously blogged, state and provincial securities regulators across the U.S. and Canada have been actively policing the marketplace for ICOs and security token offerings, supplementing efforts at the federal level in the United States undertaken by the SEC. Texas and Massachusetts have been particularly active on this front, and New York recently issued a blistering report on the status of crypto exchanges. Colorado and North Dakota are among the latest states to announce enforcement actions against crypto businesses.