The DeFi Education Fund (DEF) recently submitted a letter to the Securities and Exchange Commission (SEC) proposing five core principles for creating a “token safe harbor” framework to support decentralized finance initiatives. The recommendations are aimed at helping the SEC structure a time-limited exemption for token projects that are developing towards decentralization, providing a regulatory environment that encourages disclosure without prematurely classifying assets as securities.
One of the key principles proposed by DEF is the adoption of a technology-agnostic approach in the safe harbor framework. This approach would focus on addressing the risks of activities rather than prescribing rules for specific blockchain models or technical implementations. The organization warned against favoring specific technologies, as it could hinder innovation in the space.
DEF also emphasized the importance of broad eligibility criteria for projects aiming to decentralize. They argued that the safe harbor should be open to a wide range of projects, including those that have already distributed tokens, as long as they meet decentralization goals. This inclusivity is seen as necessary to ensure that projects launched before clear regulatory frameworks are established can still comply in the future.
In terms of disclosure requirements, DEF recommended carefully calibrated obligations that balance material information needs with the challenges faced by early-stage development teams. They suggested disclosures focused on source code transparency, token economics, governance structures, team and insider activities, cybersecurity audits, and development roadmaps. The organization also proposed periodic disclosures throughout the safe harbor period to streamline compliance through API connectivity and blockchain automation.
A clear “Exit Test” was also highlighted as a crucial component of the proposed framework. This test would define when a project has decentralized enough to no longer be considered a security under US law. Key criteria for passing the Exit Test would include maximum transparency, permissionless participation, user custody of assets, lack of centralized control, fully automated transaction processes, and the absence of retained economic authority by any single group.
DEF also recommended a realistic timeframe for projects to meet these benchmarks, such as three to four years. Projects that fail to meet the criteria within the initial window can apply for an extended safe harbor period, provided they demonstrate good faith efforts to decentralize.
In conclusion, while supporting the creation of a token safe harbor, DEF called for Congress to develop a comprehensive legislative framework for digital assets. They believe that durable legal clarity must come from statute rather than temporary regulatory carve-outs. The organization committed to ongoing engagement with the SEC and the broader crypto community, indicating that they would be publishing their recommendations publicly to solicit further feedback.