Paul K. Drexler


Tired of the power that mega platforms wield over the web, a growing chorus of internet users has hailed the arrival of blockchain technology, believing it can be used to build a new internet. Called “Web 3.0” by some, the new internet would allow users to exchange goods and services—digital currencies, cloud computing power, data storage—without needing a central intermediary to validate transactions. Instead, users would transact through decentralized platforms that use consensus-based mechanisms to verify users’ exchanges. And rather than rely on fiat money, users would use the platforms’ native currencies, called “utility tokens,” as the media of exchange.

Utility tokens also serve another purpose. Because rebuilding the internet is a costly endeavor, the groups developing decentralized platforms have turned toward selling utility tokens to fundraise their efforts. However, the issuance of utility tokens has caught the eye of the Securities and Exchange Commission (“SEC”)—the federal agency in charge of enforcing the nation’s securities laws—which has asserted its authority over utility token issuances. Unfortunately, the SEC’s oversight lacks transparency, and the agency’s rules do not protect investors against the risks they face in the digital economy. This Note calls for a bright-line test that would entitle issuers of utility tokens to a rebuttable presumption that the securities laws do not apply to sales of the issuers’ utility tokens if their tokens meet each of the test’s factors. This Note also advocates for modernizing the Regulation D private placement exemption so that it can address the realities implicit in token purchases. The changes pushed by this Note aim to quell developers’ uncertainty and foster the ingenuity behind Web 3.0.

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