Cryptocurrency used to fundraise for business ventures are regulated securities, cryptocurrencies like Bitcoin are not, and relevant laws will reman, the same, Securities and Exchange Commission (SEC) Chairperson, Jay Clayton, said yesterday on CNBC.
The point made by Clayton draws a hard line for any cryptocurrency that is traded on an “exchange.” Clayton is effectively stating that utility tokens ONLY exist if they are fenced off. Digital currencies, such as Bitcoin and Ethereum, are treated as a commodity and do not fall under the aegis of the SEC. If the concept of a tradable utility token is possible (in the US), it appears that Congressional action will need to follow as Clayton’s comments are quite stark.
Clayton has made similar statements in the past and has even chastised advisors and legal professionals enabling slippery ICO undertakings. In a speech delivered in January, Clayton told the Securities Regulation Institute:
“Most disturbing to me, there are ICOs where the lawyers involved appear to be, on the one hand, assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but call it an “ICO,” which sounds pretty close to an “IPO.” On the other hand, those lawyers claim the products are not securities, and the promoters proceed without compliance with the securities laws, which deprives investors of the substantive and procedural investor protection requirements of our securities laws.”
In the CNBC interview with Bob Pisani, Clayton said that while the distributed ledger technology (DLT) upon which many cryptos are based has “incredible promise” and can, “drive efficiencies not only in the financial markets, but in a lot of markets,” in financial markets, two issues have “come to the fore”: cryptocurrencies and crypto tokens (“crypto” refers to the cryptographic systems used to generate and circulate coins and keep transaction records).
“Cryptocurrencies [IE Bitcoin], said Clayton, “replace the dollar, the Yen the Euro- that type of currency is not a security.”
According to Clayton, a co-called crypto “utility token,” a tradeable item initially sold to raise funds to build a network where the token may some day have a function, is, in fact, a thinly-veiled security:
“A token, a digital asset, where I give you money and you go off and start some venture…and in return for giving you my money, you say, You know what? I’m going to give you a return, or you can get a return in a secondary market by selling your token to somebody. That is a security and we regulate that. We regulate the selling of that security and we regulate the trading of that security. That’s our job, and we’ve been doing it for a long time” [emphasis added]
A Stark Distinction
“…Your saying the way you look at most ICOs, they are a security,” asked the interviewer, Bob Pisani.
“Correct,” said Clayton.
“Are you planning now to make a clear statement to that effect? Because there seems to be a lot of confusion,” asked Pisani.
“Bob, I hope I just did. If it’s a security, we’re regulating it…We’ve built a $19 trillion economy. a securities market that’s the envy of the world following these rules.”
Lawyer Marco Santori and head of the Ethereum consortium ConsenSys, Joe Lubin, among others, have worked hard to shield crypto tokens from being perceived and defined as securities by publicly emphasizing their “innovation” and eventual utility on networks built from the proceeds of selling them. One main tactic has been a game of shifting terminology.
In the beginning, everything was a “coin” or cyber currency traded blatantly on crypto exchanges for profit.
But when the SEC began more and more training its radar on the ICO field, and when it became clear that a majority of crypto coins would never be adopted by retailers as a currency because of low liquidity, network unreliability and volatility, tokens could no longer pass themselves off as “currencies.” Emphasizing a token’s “utility” took hold.
Over a thousand ICO “utility tokens” have since raised billions of dollars for companies not even on testnets yet.
The hype around “utility tokens” is so great that EOS, an Ethereum knock off that doesn’t even have it’s own chain yet, reportedly raised $4 billion in its ICO, whereas the recent sale of established and beloved tech company Github brought in only $7.5 billion.
EOS, a pre-product network that found a critical bug right before mainnet launch: 12B
GitHub, 10-year old application with 30 million monthly active users, awesome UX, and extremely strong network effect: 7B
If this is not irrational exuberance then I don’t know what is.
— Qiao Wang (@QWQiao) June 5, 2018
As the regulatory writing-on-the-wall has gotten clearer and clearer, the trend now in crypto is to seek to be a legally compliant “security token.” A majority of big name crypto VCs and issuers began complying with last year following the SEC DAO report – widely viewed as a shot across the bow to bring ICO issuers (and enablers) into line.
But Chairperson Clayton sees barely a distinction:
“If you have and ICO or a stock and you want to sell it in a private placement, follow the private placement rules. There’s no secondary trading…If you want to do an IPO with a token, come see us, file financial statements, file disclosure, take the responsibility our laws require and we’re happy to help you do a public offering.”
“We are not going to do any violence to the traditional definition of a security, which has worked well for a long time.”
This is a must watch video.