Digital Token Act Transforms Cryptocurrency Capitalization in Colorado

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Amidst a wave of state regulatory measures concerning digital currency, on March 6, 2019, the governor of Colorado signed into law SB19-023, which enacted the Digital Token Act (the “Act”). By amending provisions of the existing Colorado Securities Act, the new bill provides limited exemptions from current securities registration requirements and also exemptions from the licensing requirements for securities broker-dealer and salespersons as they may be applicable to persons dealing in “digital tokens.”

The scope of the Act’s applicability is subject to a given currency’s qualification as a “digital token” per the definition set forth in the bill. Whereas, at the federal level, the SEC’s parameters for classification of digital tokens creates a situation in which nearly all such tokens are non-compliant with securities laws, the Act’s definition is broader, more inclusive, and far more conducive to regulatory compliance.

Digital token” is defined as “a digital unit that is: (1) created (a) in response to the verification or collection of a specified number of transactions relating to a digital ledger or database; (b) by deploying computer code to a blockchain network that allows for the creation of digital tokens or other units; or (c) using any combination of the methods specified in (a) or (b); (2) recorded in a digital ledger or database that is chronological, consensus-based, decentralized, and mathematically verified in nature, especially relating to the supply of units and their distribution; and (3) capable of being traded or transferred between persons without an intermediary or custodian of value.”

Moreover, the limited exemptions afforded by the Act only apply under the following circumstances:

1. The issuer of the digital token (a) effects or attempts to effect the purchase, sale or transfer after the Colorado Securities Commissioner initially promulgates implementing rules; and (b) complies with all of the requirements of the Act and those contained in the rules promulgated by the Securities Commissioner;

2. The issuer submits an online notice of intent with the Securities Commissioner;

3. The digital token’s primary purpose is consumptive in nature;

4. The issuer markets the digital token as being used for a consumptive purpose and does not market the digital token as being used for speculative or investment purposes; and

5. The consumptive purpose of the digital token is available at the time of sale or, in the alternative, all of the following conditions are met: (a) the digital token’s consumptive purpose is available within one hundred eighty days after the time of sale or transfer of the token; (b) the initial buyer is prohibited from reselling or transferring the digital token until the consumptive purpose of the digital token is available; and (c) the initial buyer provides a knowing and clear acknowledgment that the initial buyer is purchasing the digital token with the primary intention of using the digital token for a consumptive purpose and not for speculative or investment purposes.

Within the context of the Act, having a “consumptive purpose” means providing or receiving goods, services, or content, which includes access to goods, services, or content.

Sponsored by Republican Jack Tate and Democrat Steve Feinberg, the Act is Colorado’s second attempt in twelve months to pass legislation related to exemptions for cryptocurrency. The initial piece of proposed legislation failed by a narrow margin in April 2018 after some lawmakers reportedly changed votes in the eleventh hour.

Officially effective starting in August 2019, the Act should ideally open the door for blockchain and cryptocurrency start-ups to consider expansion into Colorado, as the state is now poised to become the go-to region for the burgeoning digital currency industry. Furthermore, Colorado’s successful enactment of the Act highlights the significance of pro-blockchain officials holding prominent positions in government.

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