cryptocurrency, bitcoin, ethereum, crypto
Today, the Chairman of the Securities and Exchange Commission, Jay Clayton, released a strongly worded statement on cryptocurrencies.
He made this bold observation:
“By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions . . . .”
“omg the SEC just called cryptocurrency a security and is bringing down the Big Brother hammer.”
Not really, no.
So Wait What Did He Say?
First, Chairman Clayton voiced the standard concerns and urged investors to be careful and diligent when it comes to investing in new “promising” opportunities like cryptocurrency. Well, duh. That’s not news. In fact, that same advice applies to, oh, I don’t know, subprime mortgages issued by the most “reputable” financial institutions in the US.
He also urged professionals to fulfill their responsibility for protecting everyday consumers.
Then he gets to the good stuff.
On the Spectrum
Chairman Clayton reasserted the same stance that the SEC has previously taken: whether a cryptocurrency is a security will totally depend on the circumstances.
Whether a cryptocurrency counts as a security matters because the sale of securities needs to either be registered with the SEC or fit into an exemption. And if you ignore the SEC rules, you can be forced to undo the whole ICO or IPO or whatever it was.
Oh, and if you want to register your “security” issuance with the SEC, well, that will cost millions of dollars.
(If you want some more background on what a security is and whether Bitcoin is one, go read "The Fifth Factor: Are Cryptocurrencies Securities?")
Here’s a (simplistic) mindmap of the cryptoscape:
See where the Chairman’s “bold” statement fits in?
Most people instinctively get that a currency is not a security. *cough* Bitcoin *cough*
Buying tokens in an ICO that promises to distribute dividends to you if its business selling some physical product takes off...well that sound like a prototypical security, right?
And buying something that you can only use for non-monetary purposes, like, I don’t know, cryptographic cats, really doesn't seem like you’re buying a security, right?
But what if it’s both?
What if, say, a token gives you the option between using it to breed digital cats . . . or receiving dividends.
Kind of seems like a security, right?
This in-between, where a cryptocurrency is both utilitarian and monetary, is the gray area that Chairman Clayton’s statement are really aimed at.
Basically, he said if anything has a feature that resembles a security, it’s a security. Doesn’t matter if it has other features.
(Sidenote: if you don’t want to be regulated as a security, maybe stop calling your token issuings an acronym like ICO, which explicitly borrows from IPO, which is one of the most regulated securities transactions. . . just a thought.)
The SEC has been somewhat silent on crypto, but it made a pretty bold statement today. And that may shake the cryptomarkets short-term.
But it’s actually probably good for crypto in the long run. It’s targeted at startups that are basically just crowdfunding seed money and instead of something called “stock,” are just giving investors tokens.
That which we call a rose.
This will hurt some small, nascent blockchain-based tech companies, yes. But the SEC taking a harder stance will also prevent fraudulent ICOs.
Less fraud leads to more legitimacy, which leads to more adoption.
And regulatory action like this is not something to be feared with the cryptosphere as large as it currently is.
This is not an attempt to kill crypto.
It’s acceptance and acquiescence by regulators. They see it’s here to stay. In fact, Chairman Clayton spent a long paragraph of his statement talking about the benefits cryptocurrencies.
This wasn’t a condemnation.
It was an endorsement.