In 2017, cryptocurrency fans hailed so-called Initial Coin Offerings, a sort of initial public offering for the Bitcoin crowd, as the future of corporate fundraising. Amid the buzz, crypto companies rushed to cash in by selling digital tokens to fans and investors.
Fearing that consumers were being fleeced, the Securities and Exchange Commission warned against ICOs and then declared such offerings amounted to an illegal sale of securities.
Now, however, one SEC commissioner is touting a plan that would permit ICO sales as long as they comply with certain rules. Commissioner Hester Peirce, who proposed the plan at a blockchain conference in Chicago on Thursday, says she wants to create a “safe harbor” that would give digital token projects three years to show that tokens they issue are not securities.
In an interview with Fortune, Peirce says her fellow SEC commissioners have legitimate concerns about the potential for fraud with token offerings. But she says that the guardrails she has proposed would protect investors while allowing innovation to flourish.
Those guardrails would require companies selling tokens to publish detailed information about their projects on their websites, including the identity of the ICO team members as well as the project’s source code, transaction history, and financial beneficiaries. To avail themselves of the safe harbor, and avoid trouble with the SEC, companies would have to file a notice documents with the SEC’s online Edgar system.
If Pierce’s proposal is adopted by the SEC, it would address complaints by crypto supporters that the agency is stifling innovation in financial technology, and pushing entrepreneurs to leave the U.S. for places with more favorable regulatory climates like Asia and Switzerland.
“If adopted, the proposed safe harbor could be the most groundbreaking development for the U.S. cryptocurrency market to date,” said Catherine Coley, the CEO of crypto exchange Binance U.S. “In the long run, it will help bring more Americans into digital asset trading and foster greater network participation.”
But Peirce’s plan could also open the door to the sort of speculative excesses and rampant fraud that took place during the 2017 cryptocurrency bubble. According to one analysis of 1,450 digital coin offerings in early 2018, 271 of them contained red flags such as plagiarized investor documents or fictitious executive biographies.
Peirce—whose positions have earned her the moniker “crypto mom“—acknowledged that the risk of digital token scams is real, but stresses that her proposed transparency rules would help prevent them.
“My message to people is always think carefully before you buy something,” she says. “For companies, if you don’t share the required information, the SEC can bring a fraud case. It’s designed to shed light on these projects.”
Digital Tokens and a divided SEC
While Peirce’s proposal is supported by the cryptocurrency industry, the plan is unlikely to gain support from her colleagues at the SEC.
According to Valerie Dahiya, an attorney who specializes in digital currency at law firm Perkins Coie, the other four commissioners—including Chairman Jay Clayton—have so far taken a dim of view of token sales, making Peirce an outlier.
“This is really one commissioner giving her personal thoughts in a speech,” she says, adding that SEC has no formal process underway to revise its regulations.
Peirce’s tenure at the SEC ends in June, and her views could help her follow other former regulators who have joined cryptocurrency industry.
Meanwhile, the legal status of digital tokens remains up in the air. One SEC official acknowledged last year that certain tokens—notably Ethereum—could be securities at the time they launch, but then cease to be securities over time as they become decentralized like Bitcoin, which is controlled by no company or individuals.
This legal uncertainty has frustrated many in the cryptocurrency industry, who say it has stymied their ability to launch and raise money for token projects.
Clear regulatory guidance, however, may ultimately come not from the SEC but from the courts. Dahiya, the attorney, notes that the agency has placed its enforcement chips on a legal fight over the definition of securities. The dispute pits the agency against a messaging company called Telegram, which had a high-profile ICO in 2018 that raised $1.7 billion.
The case, underway in Manhattan federal court, could lead a judge to clarify how long-standing Supreme Court rules, known as the Howey test, should apply to cryptocurrency projects.
“A lot is riding on the Telegram enforcement action,” said Dahiya. “The fact they’re going forward with this litigation speaks clearly to the position of the Commission.”
Peirce, for her part, says her proposal represents a way for her fellow commissioners to achieve what they want from an enforcement perspective without limiting innovation in the crypto sphere.
More must-read stories from Fortune:
—Why Facebook’s Libra hangs in limbo—and what’s next in the digital currency race
—How blockchain will shake up the financial world
—WATCH: It doesn’t matter if Libra ever comes to fruition
—How fintech’s third wave will change how you bank
—Bitcoin is too slow. Is Lightning Labs poised to fix that?
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