Securities and Exchange Commission (SEC) Commissioner Hester Peirce published an updated version of her “safe harbor” proposal last week, just ahead of Gary Gensler’s confirmation as SEC chair. The old version introduced the concept of a three-year grace period to let a project launch. The new version defines what a successful project would actually look like. I break it down below.

Cryptocurrency startups could benefit from a three-year grace period to build and launch their projects before they have to worry about federal securities laws. At least, that’s the premise of Hester Peirce’s proposed “Token Safe Harbor.” The second-term commissioner first proposed a safe harbor for cryptocurrency startups last year, which received feedback but wasn’t adopted by the other commissioners. She introduced a revised version on Tuesday, creating some more specific guidance for how a company could verify that its project is operational. 

At present, most cryptocurrency startups that wish to raise capital by selling tokens ahead of building or launching must register with the SEC or risk facing an enforcement action. Registration could be costly if a project doesn’t have existing funds, and selling tokens in compliance with federal securities laws carries its own set of burdens. Commissioner Peirce’s proposal would let a startup take three years to create a “decentralized” blockchain network before having to assess whether it is in compliance with securities laws or whether the token still meets the federal definition of a “security.” 

In other words, the safe harbor gives projects three years of breathing room, something many founders believe would benefit them. This could let startups come to market the same way the original Ethereum network did, said Lindsay Lin, a partner and counsel at Dragonfly Capital. 

“Projects with novel technologies are not free to do what Ethereum did to bootstrap the network (initial coin offering, development, marketing) lest they violate securities laws,” she noted. “This fear creates a moat for grandfathered incumbents, which may be long-term counterproductive for the industry since challenger technologies may not easily break through the regulatory barrier to entry.”

The most tangible difference between the old version and the new would be the introduction of exit guidance. Under the Token Safe Harbor Proposal 2.0, companies would have to tap outside counsel to evaluate their projects and create a report assessing whether the project meets certain criteria to be considered “decentralized” or “functional.” 

If a project meets neither requirement, it would have a few months to sunset and become compliant with federal laws on registering as securities issuers. 

As drafted, the revised proposal would let a company continue operating if it meets either definition. In other words, a functional, centralized project could escape the registration requirements. 

“You can imagine a more centralized situation where there’s still a functional network,” Peirce told CoinDesk. “I hope to get feedback on that second part because a lot of people on the initial version were really focused on ‘how do we figure out decentralization,’ so maybe people will feel strongly that that second piece should change or is not necessary.”

Her goal is to determine when a project might fall outside the SEC’s jurisdiction and, therefore, would not have to register as a securities issuer. 

Still, a project might be incentivized to only become functional and not focus on decentralization, said Grant Gulovsen, an attorney who advises startups in the crypto sector. 

He said crypto startups can absolutely benefit from the safe harbor proposal, though he noted that existing crowdfunding regulations (Regulation CF) allow startups to raise over $1 million provided they meet certain conditions. 

“I’d be in favor of relaxing the restrictions across the board, but it doesn’t make sense to me from a public policy standpoint to create such an uneven playing field that benefits crypto startups because blockchain, especially given the low threshold required to meet Network Maturity under the Token Safe Harbor’s functional network test,” he said.

Lin told CoinDesk the revisions were mostly “wonderful,” pointing to the disclosure and reporting interval requirements.

However, she said the guidance could be more specific on the exit guidance by defining who can determine whether a project is decentralized or functional, and what might disqualify a project. 

“In the end, network maturity will still be a subjective standard. Thus it’d be useful to have more info on how it’ll be judged and what factors are most important,” she said, adding, “Given the consequences are so severe, it’d also be useful to lay out an appeals process. These items don’t necessarily have to be written in the rule itself, but it’d be helpful to have guidance to provide more clarity.”

Lin said she does hope “Network Maturity” might be more clearly defined, or precedents created to more clearly establish. 

One of the most novel moves Peirce made was posting the entire updated proposal on GitHub, a popular hosting platform for software where anyone can provide feedback by way of comments or suggest changes through pull requests. 

This was “a brilliant idea,” said Gulovsen, who has already posted comments on the GitHub page. “I applaud Commissioner Peirce for posting it on GitHub. It gives legal practitioners, software developers and any interested parties an opportunity to comment directly on the proposal and creates a completely transparent public record.”

The move also allows developers, lawyers and other parties to respond directly rather than have to go through lobbyists to propose suggestions, he said.

Pierce said she posted the proposal on GitHub “to really encourage people to engage with the text and think about how to improve it.”

She also hopes that it will help show new SEC Chair Gary Gensler how much engagement there is, and what issues people believe could be improved.

Peirce solicited feedback for the original proposal as well, and said the comments she received in the last year showed people do want a safe harbor. 

“I think it’s just a piece of the clarity question because whether or not something has to be traded as a security matters for people in the [industry], it matters for broker-dealers,” she said. “We have a pilot program that is available now and that, too, is only available for digital asset securities so we have to be thinking about whether or not things fit within what bucket.”

Part of the safe harbor idea is to help the SEC move away from “regulation by enforcement,” which is when the regulator brings enforcement actions against what it perceives as wrongdoers and lets the rest of the industry try to piece together what behavior is acceptable.This approach does not provide clear guidance on what is permissible. 

“There are always questions around whether we’re leading with enforcement or whether instead of doing that could we provide some regulatory clarity,” Peirce said. 

Peirce said she published the proposal ahead of Gensler’s final confirmation votes, noting that he has past experience in the crypto sector. 

 “I hope he will be thinking about how to provide regulatory clarity with respect to crypto generally,” she said. “I’d like this to be something he considers.”

Last week, U.S.-based crypto exchange Coinbase finally went public, marking Wall Street’s most public acceptance of a crypto startup to date. You can catch all of CoinDesk’s coverage here, but in short: Trading began early afternoon, the price went up a bit, then went down a bit and it’s trading around $330 as of Monday.

The listing reverberated beyond just the U.S. as well – as my colleague Sandali Handagama wrote. Execs at crypto exchanges in different countries see the listing as a signal to the traditional financial world and its members, who may now take the digital asset industry more seriously.

Now, we get to wait and see which company is next and whether that marks a further acceptance of crypto by Wall Street – or, a further acceptance of Wall Street by crypto.

Gary Gensler has officially been confirmed as leader of the Securities and Exchange Commission. It only took three months and three different votes. Now, to paraphrase the immortal words of Bill Belichick, we’re on to the Commodity Futures Trading Commission. No official word on who might be tapped to lead the commodities regulator or the Office of the Comptroller of the Currency.

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde. 

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See ya’ll next week!