The “Meeting” on Monday, May 7th and continuing throughout the entire week hosted by the SEC and CFTC ended up not actually being a thing, but this topic shouldn’t be taken any less seriously in the wake of this “Internet hoax.” The fact of the matter is that a decision needs to be made on which ICO’s are currently or have previously acted as a security and which did not. If it’s decided that particular coins have operated in ways that would classify them as securities at any point in time, then technically they would have been doing so illegally.
Selling unregistered securities is a pretty big offense as far as regulatory violations go, and has the potential to issue significant fines and even more importantly halt trading within the United States if the SEC decides to enforce this option. Among the 1000+ ICOs that will be affected by the results of this regulatory game of spin the bottle, are the two heavy hitters Ethereum (ETH) and Ripple (XRP). Both of which are amongst the top 5 largest cryptocurrencies both by their trading volume and market cap, Ethereum second only to Bitcoin.
(ETH-Trading @-$760.21 Market Cap- $25,018,659,911/ 24 Hr Trading Volume- $2, 953,760,000)
(XRP- Trading @$.795 Market Cap- $31,456,185,345 / 24 Hr Trading Volume – $486,468,000 ) *Both Prices Based on the time the publication of this article
The decisions made and the actions taken will be setting a precedent for what the ICO structure will look like in the United States for the foreseeable future. The ICO Vs. Security issue has been a topic that the SEC has been vocal about for some time now. Mentions of the SEC’s concern of ICO circumvention of security registration goes back to 2017, long before their unregistered crypto exchange crackdown announcement on March 7th.
What Makes A Commodity Become A Security?
The test set as the benchmark for distinguishing whether or not the investment is acting as a security and therefore needs to be registered established in the 1934 Securities Exchange Act named the Howey Test. The test asks the following four questions if the answers to all four are yes then the product is a security.
The Howey Test Questions:
1. It is an investment of money
2. There is an expectation of profits from the venture
3. The placement of money is in a common enterprise
4. Any profit comes from the efforts of a promoter or third party
The pre-ICO phase is, in particular, the timeframe in question for nearly all of the coins that are under regulatory scrutiny. The reward of Ethereum or Bitcoin or any other coin to the miners verifying transactions and the coin functioning on a blockchain seems to be agreed upon by all as a commodity. It’s the purchase of these coins by investors before there was any utilization of anyone particular coins intended functionality that is they timeframe currently in question. This is where the SEC claims that investors pooled money to invest in company’s that they took no part in hoping to see a profit on their investment, this is what ETH and XRP along with all of the others need to get at least one “No” for in order to have not seen as an enterprise engaging in the illegal selling of an unregistered security.
Ethereum & The SEC
Ethereum and its founder Joe Lubin has truly been on the forefront of the blockchain movement. The technology he developed (mind you years before nearly all of the current crypto assets were developed)offered faster blockchain speeds than it’s only remaining predecessor Bitcoin, this along with the ERC 20 capabilities allowing so many coins to piggyback off of this development and be acquired through non-centralized exchanges such as Ether Delta is nothing short of brilliant. Now that I’ve said that, his etiquette when dealing with the United States Regulatory Agencies bring different words to mind.
I understand where Joe is coming from, he spent a lot of money with a lot of legal firms and lawyers proactively getting ahead of this before it was ever an issue. He has felt secure for some time, years even, that if this ever comes up, and it already has in several countries, that he has the empirical evidence to support that he was never acting and a security during the ICO phase of Ethereum. He is so confident in this that he has dropped the following public soundbites:
“The regulators that matter understand what Ethereum is.”
“We spent a tremendous amount of time with lawyers in the U.S. and in other countries, and are extremely comfortable that it is not a scurity; it never was a security,”
Joe Lubin – Founder of Ethereum
Those of us who have worked under-regulated financial sectors can affirm that when it falls under their jurisdiction the regulators have absolute power over your business and career, they know this fact very well. This means they have complete discretion over how to interpret their bylaws as well as when and who to enforce them on. Many lawyers and legal teams have assured their clients that they are “iron-clad” and “air-tight” prior to regulatory meetings hours before their permanent barring of operating in as any registered financial capacity was issued.
They have been very vocal in their thoughts towards ICO’s since at least mid-2017, they want this underneath their jurisdiction real bad. In my mind, their “discussions” are just a formality for the public. Crypto Tokens are very popular with the general public and they do want to appear as if they are taking the counter-arguments into consideration, this within itself is a courtesy that rarely occurs, but they made their decision on what these are a long time ago.
How this plays out is still only known by them, and whether they offer amnesty and set registration requirements moving forward, or hit every ICO for illegal securities we’ll just have to wait and see. It seems logical and just to go with the warning but regulators have been known to act subjectively when they feel someone has been getting away with something intentionally. I feel I made an argument for the SEC’s tendency to be one-sided take on subjects they’ve already made decisions on in their minds, and truly I hope this does not affect good cryptocurrency’s like Ethereum and Ripple. However, and I saved this for the end (because I’m least passionate about it) if I’m being 100% honest here, they’re probably right to classify ICO’s as securities, but at this point does that really matter?