“I believe every ICO I’ve seen is a security.”
Clayton had been referring to how initial coin offerings (ICOs) need to be regulated as securities by federal regulations. He mentioned that only then can they be observed the way their definition asks for them to be measured.
This particular line of thought created a buzz in the cryptocurrency community, who immediately started presenting ideas on whether Clayton’s statement held true according to observations made by experts within the industry.
So what is the essence of a security?
The very definition of a security is that it is a financial instrument holding monetary value.
It also refers to the holder’s ownership rights in the company or asset to which the financial instruments belongs.
Now, think about it.
The first point defines a token, while the second one defines the ownership stake, which in case of most ICOs, is also very true.
This covers the broader definition of securities, which now brings us to ICOs being traded as that asset class, and the issues that doing so might pose.
Possible issues on hand
First and foremost, if ICOs are deemed as securities, then more than half of currently running ICOs might be deemed as not meeting the minimum regulatory standards since all securities need to be registered under the Security Act of 1933.
The regulations that will need to be met are extensive and will take some time for each of the company to go through. With the number of ICOs that come about every day, it goes without saying how much time it will for one ICO to get passed through proper regulations before the next ICO could get its chance.
However, at the same time, if any company is being formed from scratch with a long-term objective in mind, then it would very certainly want to ensure that its employees and stakeholders do not wake up one day to news of its questionable corporate standing due to a new regulation.
Therefore, it seems that while it is not necessary for such companies to go through regulations at the moment, it would certainly be prudent of them to have everything in check in case the SEC and other authorities change their mind and work towards passing a law that terms such stakeholder tokens as securities.
But some tokens describe themselves as utilities
During 2017, the year that ICOs went through an unprecedented rise, most of the tokens were marketed through the same perspective. You buy the token, and you get a share in the company or a say in governance. If not, then you get to use the token later to utilize functions from the company’s blockchain, thus calling them as utility tokens.
These tokens would prove trickier to regulate as securities because they are not directly providing a share in the company but selling its services in a way at a discounted rate.
That being said, if a regulation passes later that terms all ICOs as security offerings, then this may cause an issue for these utility token providers. They might need to go through specialized “Blue Sky” securities law to determine and finalize their standing as non-security tokens.