During the initial growth of the Internet, the United States enacted a variety of Safe Harbors, such as the DMCA, that allowed new innovation to unfold. We now need a similar approach to crypto tokens in order to help build the blockchain infrastructure.

Blockchains allow the creation of data stores and applications that have network effects but are not controlled by a central player. This helps address the key issue of centralization and monopoly like positions currently observed in the digital economy, with companies such as Facebook, Google and Amazon.

Crypto tokens play a central role in the consensus protocols which keep all the participants agreeing on the state of the system. They do so by providing incentives to expend the necessary compute and network resources required by the protocol.

What kinds of Safe Harbor are required to allow this innovation to flourish?

1. Companies and Projects Must be Able to Issue Tokens and Distribute them Widely

Developing advanced blockchain systems requires serious engineering work, which has to be financed. The ultimate value of these systems does not reside in the companies that start them because they are open protocols. That means teams and investors must be rewarded in tokens instead. Furthermore tokens need to be distributed widely to build an actually decentralized system.

A Safe Harbor for initial token sales and issuance could impose requirements on investors that are along the lines of Rule 144 governing Restricted Securities, such as imposing holding periods and information requirements prior to sales. Token distributions via faucets or crowd sales with small dollar amounts per buyer should be exempted from this requirement.

2. Tokens Must be Easy to Buy and Sell on an Ongoing Basis

Entities that supply compute and network resources to maintain a blockchain earn tokens. Those who want to use the service need to spend tokens. Since the supply and demand are separate from each other an efficient mechanism for buying and selling tokens is required. These cannot be securities with all the complications that would entail (imagine for a moment if concert tickets were securities).

A Safe Harbor for secondary token markets could impose utility token requirements. That means the tokens that qualify for this safe harbor cannot represent ownership interests in an entity (which would clearly make them securities).

The SEC and CFTC have indicated that they are looking to regulate ICOs and the trading of crypto currencies. I believe that a Safe Harbor approach along the lines described above would be best for fostering this innovation, while also protecting investors.