Greater Clarity on Cryptocurrency and Securities Regulation
The Securities and Exchange Commission has billowed a fresh breath of life and clarity into the legal
status of Ethereum, Bitcoin, and other cryptocurrencies. The policy states that without more, they are
not securities within the meaning of the Securities Act. 1/ The policy states that Bitcoin and Ethereum may not be regulated as a
security when issued and used as a medium of exchange. In essence, the determination of whether an ICO or token is
a security depends on the terms of the issuance. It revolves around the question: would a reasonable investor rely upon a seller’s commitment to do some future
act to gain profit on the investment? ( See the full
remarks here of William Hinman,
Director of Corporation Finance, SEC, June 14, 2018)
The traditional test of a regulable instrument is similar(
see e.g. SEC v. Howey). It is based in the expectations created by the terms
of the initial public offering. The question appears to be : whether the buyer or
investor must rely upon the ICO issuer to perform some specific or general
mission. If yes, then it may be a security, but if not, then it probably is
not. Bitcoin and Ethereum are such generally circulated tokens that buyers do
not appear to be motivated or enticed by any particular or general undertaking
by the issuer.
The opinion notes that among the uses of cryptocurrency are personal and commercial transactions in which
the cryptocurrency is a simple medium of exchange. Some Asian issues have had
this design- a currency meant for everyday usage to buy good and services, sell
products, provide loan funds, serve as an
asset when a business seeks to borrow funds .
In an announcement
at Yahoo Finance’s All Market Summit: Crypto in San Francisco on
Thursday, the U.S. Securities and Exchange Commission Director of
Corporate Finance William Hinman said that the commission would not be
classifying ether or bitcoin as securities.2/
The keys to the SEC analysis include the nature of the
blockchain that supports the currency. The opinion seems to focus on Whether the blockchain
structure is decentralized; presumably, this relates to the absence of a central control by the issuer. The logic of this position is not readily apparent given the essential
construct of the blockchain as a distributed ledger. The ruling is important to
the future direction of cryptocurrency, the situation with currency exchanges
may differ substantially in a regulated environment.
The SEC policy is an
opinion that will have legal effect in SEC proceedings; presumably federal
and state courts will rely upon the SEC’s
administrative expertise and follow the advice when considering claims concerning
regulation and investor rights in cryptocurrency.
<h3> The Lesson is in the Purpose</h3>
Many ICO’s will be regulated securities under the new SEC
rule because they are tied to particular promises , projects, or themes. The
investor would have a reasonable expectation of some further or continuing
action by the issuer to affect the value of the coin. That expectation defines
the classic area of securities regulation. The investment policy protects investors
against offers that have big promises and no delivery. These empty promises
leave investors adrift and diminish public confidence in the financial markets.
<h3>Greater Clarity? </h3>
If you are in the process of putting together an ICO, does
the SEC announcement provide guidance?- Can
you now choose to shape
a regulated or deregulated ICO? You
will likely still need a battery of high-priced legal and crypto experts to get
the desired outcome.
Liquidity is a prime consideration and a regulated currency
issue may have greater liquidity among institutional investors that have begin
shopping the cryptocurrency exchanges in greater numbers than before. A
successful ICO might have to thread a needle between broad appeal and
generating liquidity and narrow appeal to inspire participation. For example, a
project aimed at environmental improvement might have to emphasize a generic effort
rather a just some specific projects. On the other hand, some ICOs will more
clearly leans towards regulation and the challenge will be to find exchanges
that can provide liquidity for a regulated ICO and token.
- Trend toward Regulation and Broader Markets
There have been some important cryptocurrency developments and news in the area of the NYSE,
Crypto-derivatives, CoinBase, and Gemini. These events move towards some greater
acceptance of regulation and broadening the cryptocurrency markets to accommodate institutional
investment and hedge funds. SEC clarification of the status of cryptocurrency
will likely hasten those trends.
Note: Blockchain is not Bitcoin or any other currency, and blockchain technology has many uses outside of cryptocurrency. Bitcoin might be thought of as an application in an operating system. Blockchain is the system.
Note: Blockchain is not Bitcoin or any other currency, and blockchain technology has many uses outside of cryptocurrency. Bitcoin might be thought of as an application in an operating system. Blockchain is the system.
1. SEC announces cryptocurrency ether is not a security
2. SEC director says Ethereum does not fall under
securities regulation
3. Bitcoin and ether are not securities, but some initial
coin offerings may be, SEC official says
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