Editor's note: This column has been updated to disclose the writer's advocacy of blockchain technology--the underpinning of all crytocurrencies--and a Consumer Financial Protection Bureau warning about these investments.
Today, the SEC issued an investigative report stating, "tokens offered and sold by a 'virtual' organization known as 'The DAO' were securities and therefore subject to the federal securities laws."
But before you read this as all tokens should be considered securities (as some have inaccurately reported) also note that the the SEC has pointed out, "U.S. Securities Laws May Apply to Offers, Sales, and Trading of Interests in Virtual Organizations." The keyword in this statement is "may."
As the report goes on, they continue to explain that ICOs that are offering investments must register with the SEC. However, they also point out that certain exemptions may apply. In some cases, if a token is not a security, but instead has an actual utility, then the ICO (Initial Coin Offering) may not have to register with the SEC since that would not necessarily be considered an "investment" or security. They have not released detailed explanations of exactly what would or wouldn't be considered a security, but only commented on The Dao.
Editor's note: Bitcoin and digital currencies, as with any investment, may involve the risk of loss. The Consumer Financial Protection Bureau has warned that virtual currencies, including Bitcoin, carry "significant risk" to consumers.
Here's the really good news -- Up until this point many legitimate ICOs have been "self regulating" and doing things such as not allowing U.S. Citizens to be involved if they did believe they were offering a security or investment. The SEC report was in line with self regulation that has already happened inside the community.
The community has been doing a great job of following what they believe to be the best practices in accordance with many world governments (especially U.S.), even if the project was physically not located in the United States. This self regulation shows that the community as a whole wants to the right thing. (It should be noted here that I am an advocate of blockchain technology.)
I checked with a few people in the blockchain community to get their take on this.
Blockchain enthusiast Sam Rusani said, "I think it brings legitimacy to an environment that's been running a bit too wild lately. While I'm all for decentralization, I feel like this might help limit the amount of fraud being committed in a world that's too easily manipulated at the moment."
James P. Jalil partner at Thompson Hine said, "What is interesting is that the SEC used established case law and learning in the area of securities regulation, including the basic 'Howey Test' (from the 1946 Supreme Court case SEC v Howey) and simply applied it to the novel technology of an ICO. There really is no new regulation or regulatory approach involved. It remains to be seen where the SEC goes from here. Does it continue to apply existing laws and regulations to blockchain related technology or will it adopt new regulations specifically tailored to the emerging uses of blockchain technology."
At the end of the day, this should be a good thing for the cryptocurrency and blockchain community. Platforms and cryptocurrencies that help host ICOs like Ethereum will stabilize and potentially rise in value as projects are forced to become more and more legitimate.