The US Securities and Exchange Commission (SEC) has once again demonstrated its animosity towards cryptocurrency trading and investing. Recently, the SEC issued subpoenas to about 80 cryptocurrency firms, including a $100 million crypto fund run by TechCrunch founder Michael Arrington. In a phone interview with CNBC, Arrington commented, “We received a subpoena. Every [crypto] fund I’ve talked to has received one.” Interestingly enough, Arrington didn’t seem too stressed up the subpoena, saying, “They just have to figure out what they want… They need to set up rules so we can all follow them, and the market is begging them for that.”
To date, the SEC hasn’t made it explicitly clear whether or not digital coins are securities, and therefore whether or not they are subject to the same types of disclosures, regulations, and limitations. When crypto mania was in full swing in the winter of 2017, SEC Chairman Jay Clayton released a statement on ICOs that noted, “As [ICOs] are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.” This tone clearly set the direction of the SEC’s involvement in crypto investing, and now their actions are coming to fruition.
For now, what are crypto traders–ICO investors in particular–supposed to do? It is clear that regulatory bodies in the US and around the globe are taking notice of this extremely popular method of raising capital. And to be sure, these bodies are intervening to help investors–though their actions very well may result in the opposite.
One popular strategy being utilized by dozens of companies involves a perceived loophole in the landmark Howey Case. This case, which defines a “security”, notes that investors in securities must “expect profits solely from the efforts of the promoter or a third party.” Using this case, the SAFT Project, for example, is developing a compliance framework for ICOs. The emphasis is on the utilitarian function of platform tokens, so that profits are not “solely from the efforts of the promoter or a third party”, and therefore the coins offered are not securities.
Some examples of ICOs like this include include Shping, a decentralized shopping app that lets shoppers scan product barcodes, quickly share reviews earn financial rewards in the form of platform tokens;
The Ponderapp platform, for instance, functions like a traditional dating platform—eHarmony, Tinder, Match.com, etc.—but uses the power of blockchains to create a decentralized marketplace. This removes the high fees that come with traditional dating sites, while also allowing human matchmakers to set other users up with dates and / or relationships. What does this mean in terms of regulation? First, the platform tokens act as commodities rather than investment vehicles like stocks or bonds. Ponderapp tokens facilitate matchmaking, much like dollars facilitate in person transactions. Second, practical platforms like Ponderapp have traditional competitors, making it much more likely that their business venture is a genuine one, rather than a pump-and-dump ponzi scheme.
According to some, however, this approach may not work out so well. Aaron Kaplan, the COO of Prometheum, notedsin a recent VentureBeat post, “The harsh reality is that virtually all ICO tokens are, and always have been, investment contracts, and thus securities. The proposition that utility tokens are not securities, as posited by the SAFT White Paper, is nonsense.” Added to this is the fact that Chairman Clayton said in a February Senate hearing, “I believe every ICO I’ve seen is a security.”
So again, what are ICO investors to do? The only thing they can control is their own actions. They must be extremely diligent in their upfront research. This means understanding the country of origin, the platform, and what regulatory laws are in place. Though the Howey case application may not hold up, it’s the best defense ICOs have got. In addition, they should focus on platforms that have a practical, tangible purpose. Likewise, blockchain companies need to focus on platform utility and practicality, rather than “buy this ICO because you’ll get a great return.”
So far, none of the major cryptocurrencies have gotten into trouble with the SEC, though Bitcoin, Ethereum, Ripple, Litecoin, and Bitcoin Cash are all in negative territory year to date, undoubtedly because of increasing regulatory pressure. In addition, each of these coins has come down markedly from their tremendous December 2017 heights. Time will tell whether or not cryptocurrency traders and ICO investors will be able to bounce back from such a strong pullback.