Greater Clarity on Cryptocurrency and Securities Regulation

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.

1. SEC announces cryptocurrency ether is not a security

https://finance.yahoo.com/news/sec-announces-ether-not-security-162658147.html

2. SEC director says Ethereum does not fall under securities regulation

https://www.zdnet.com/article/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

https://www.cnbc.com/2018/06/14/bitcoin-and-ethereum-are-not-securities-but-some-cryptocurrencies-may-be-sec-official-says.html

Can Ethereum Save US Democracy

An experiment born in an age of unlimited privilege and unlimited personal growth can die in this era of unlimited privilege that limits personal growth.

Part One- The Opportunity Democracy

The Framers were a far-sighted group to be sure. They were valiant men that risked hanging to pursue a reachable though difficult dream of nationhood. For them, the first step was independence from a colonial master and an Insane King. They saw the vast potential for wealth and growth in the land, water and resources of the America they knew- and they imagined that the boundless energy of its population would never exceed the opportunities that were so abundant, and stretched a far as the mind’s eye could see.

There was little concern that the tendency of wealth to coagulate economies of nations and struggle growth with suffocating privilege and class-ism. One of the leaders had that visionary, if   dark, prognosis for America. Governor Morris of New Jersey- predicted the difficult end of the American experiment as wealthy people accumulating so much wealth that they would have the power to put a strangle hold on the economy and the growth potential for nearly everyone else. Welcome to 2017- Governor Morris.

Democracy was born in Conflict and Abundance

The American experiment had written and spoken values of nobility- freedom and the inherent worth of every individual. Like the voices of Athens in the 4th Century, Jefferson might have reached to slaves to get a refreshment after speaking of the evident truths of equality. 

The Founders denied the vote to the women that fought in the Revolution, and denied the men that fought too. The colonial wealthy class had no idea of sharing power with the lower classes- although they did not impose class representation like England- House of Lords, House of Commons and so forth. 

The American equalizer was the measureless abundance of opportunity- there were fertile fields for the taking, plains full of buffalo, forests full of deer, and streams abundant with fresh water and fish. The economics seemed clear:  go west and claim anything you can’t afford in the east.

Can the evolving Value Economy and Ethereum restore the freedom of opportunity that was the silent foundation of the American experiment in Democracy?

As humans, we fail so many benchmarks of social evolution. Yet, in less than 25 years, the computer has taken hold, the smartphone has taken over, and Information Technology became a frontier for economic growth. The wealthy classes have taken control of IT and largely stemmed the tide that began in our Silicon Valley and was replicated in other advanced economies. The wealthy hang onto the pillars of trusted third parties- law, banks, insurance, privilege-based investment, and government regulation controlled- and to some extent-corrupted by industry influence.

The Jobs Act of 2016 was in part a recognition of the universality of investment and growth that can spontaneously arise and flower when governments controlled by wealth interests do not interfere effectively. The rules that carry out the Jobs Act conspicuously attempt to limit investment and create distorted access to early stage investment based on wealth. 

The Value Economy story may begin with Bitcoin and Initial Coin Offerings (ICO’s), but it casts a shadow far greater than the spontaneous fiat Cryptocurrency or cybercurrency. The new economy emerges from spontaneous opportunity taken- an Uber theory – spontaneous capital opportunity and a technological underpinning that can revolutionize the essence of transactional value.

Startups are the lifeblood of IT…

…and wealth had begun to strangle the funding. Traditional Banking gave way to relaxed traditional banking. Corporate funding became more like the energetic industries it engaged.  But it was crowdfunding that lit a fuse for the startup industry.

Crowdfunding and Ethereum

Crowdfunding is another great step that amounts to a fledgling beginning when viewed in the larger context of a global value based economy. Crowdfunding in cybercurrency may prove both powerful and unregulable. Because of blockchain, cryptography, and Ethereum, crowdfunding can use smart systems and it does not need central government oversight to enforce reliability. Ethereum is also immune to the siren call of insurance that acts upon the national economy as if an anchor in the mud .

 The new face at the table is not another variation of staid hidebound wealth. It is Ethereum and blockchain technology*. It as shown the way to growth without the trusted third parties that apply the brakes to economic evolution. The new value economy provides opportunities for investment and growth not tied exclusively to traditional wealth. Innovation can create value, and value can create many forms of capital.

Crowd style Investment: A Revival of Opportunity

Real time investment activity over the past five years demonstrated the potential for crowdfunding as a major source of investment capital. In 2014 the global total raised through crowdfunding exceeded $16.5 B.  Some industry sources estimate the current 2017 total in excess of $34 B.

The structure of crowdfunding is amenable to scale to adjust risk for investors. Groups of medium to large investors can support projects as well as larger groups of small investors. All investors can aggregate investment amounts and accept nominal leadership in selecting projects, then smart systems can assure that projects will perform or lose investment.

Ancillary business activities include managing investment groups and assets, developing projects, and creating smart agreements.  In an era of wage stagnation and negative wage expectations in many sectors of the US economy,  investment in IT startups can help extend the reach of wage earners to enhance income and open-up business ownership. 

Unlike penny stocks and highly speculative investments subject to manipulation and abuse, Ethereum with blockchain technology offers a guarantee of transparency and accurate accounting. Investment is a key to opportunity in the IT age, and crowdfunding can open investment to everyone.

Sponsorship and promotion can come from numerous sources and activities. They include the below- described potentials.

·        Social media type platforms to engage, inform, and encourage investment in IT startups including cash, fiat currency assets, and cryptocurrency. These platforms seek to bring freelance professionals, programmers, and developers  into collaborative relationships, and to bring investors into early-stage investments.

• ·        Spontaneous organization from private initiatives.
• ·        Political action that provides tax incentives and credits crowdfunding investment below a certain size, such as $1,000 or less per year. The Jobs Act rules could be a vehicle for this type of action,
• ·        State and local tax incentives, credits and matching funds for crowdfunding investments below a certain size such as $1,000 per year or less.
• ·        Commercial products aimed at nominal risk investment among a wide audience.

Part Two- Democracy and Voting
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Sources:
Ethereum- a vast platform
https://blockgeeks.com/guides/what-is-ethereum/

*Goldman Sachs on Blockchain technology 

 http://www.goldmansachs.com/our-thinking/pages/blockchain/

- Jobs Act- https://www.sec.gov/spotlight/jobs-act.shtml

- Ethereum- http://www.telegraph.co.uk/technology/0/ethereum/

- Wealth and Democracy- see e.g. Discussion of economic concentration and impactful excesses of  wealth

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