The Colorado Digital Token Act exempts digital tokens from security law regulations, should they be used for a “consumptive purpose.”

Last week, Colorado Gov. Jared Polis signed the Colorado Digital Token Act (“SB19-023”), which is expected to bring more attention to Colorado’s cryptocurrency market by addressing digital tokens within the existing framework of securities law. A security, while having a notoriously flexible definition in the US, is typically defined as an investment of money into a common enterprise in which the expected profits are to be derived from the efforts of others.This definition was (mostly) established in the 1950s by the Supreme Court. The significant advancement in technology and the development of new capital raising models made possible by, blockchains, and cryptocurrency have left many questioning if a modern definition would be superior to one gleaned from case law from the 1950s. SB19-023 not only highlights some of the legal uncertainty for prospective digital tokens and related transactions under the previous securities restrictions, but also introduces the idea of permissible purposes for currencies in the enforcement of securities laws.

The Colorado Digital Token Act largely focuses on limiting restrictions from securities registration and securities licensing requirements regarding digital tokens to spur industry development in the state.“Colorado has become a hub for companies and entrepreneurs that seek to utilize cryptoeconomic systems to power blockchain technology-based business models,“ the bill claims before noting the ambiguity created by existing securities law under Article 51 of the Colorado Revised Statutes. It goes on to determine that blockchain systems have legitimate value in building capital and networking for businesses using them in a “primarily consumptive purpose.” According to Section 4 of the bill, a consumptive purpose would include providing and/or receiving goods, services, or content, or access to any such matter.

The implications of the bill, specifically the allowance of digital tokens by consumptive purpose, mark a move towards a more developed blockchain industry. The bill indirectly addresses fundraising techniques, such as an Initial Coin Offering (“ICO”), by clarifying acceptable methods by which to issue currency, stating, “The issuer of the digital token markets the digital token to be used for a consumptive purpose and does not market the digital token to be used for a speculative or investment purpose.” While this would mean digital tokens are still unable to be used as an investment or speculation tool, industry participants are hopeful for more entrepreneur and investment activity.3

The bill, which was first introduced in January, will go into effect in early August of 2019, following a 90-day period after the final adjournment of the Colorado General Assembly.4

 


  1. Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946)
  2. “Cryptocurrency Exemption Colorado Digital Token Act.” Colorado General Assembly. February 19, 2019. Accessed March 11, 2019. https://leg.colorado.gov/bills/sb19-023.
  3. “Crypto Victory: Colorado Exempts Cryptocurrencies From Securities Laws.” The Daily Hodl. March 08, 2019. Accessed March 11, 2019. https://dailyhodl.com/2019/03/08/crypto-victory-colorado-exempts-cryptocurrencies-from-securities-laws/.
  4. Mizrahi, Avi. “In the Daily: Colorado Digital Token Act, ITI Funds Crypto Index, Fortress Blockchain.” Bitcoin News. March 10, 2019. Accessed March 11, 2019. https://news.bitcoin.com/in-the-daily-colorado-digital-token-act-iti-funds-crypto-index-fortress-blockchain/.

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