Current SEC Guidelines Reveal the Commission May Be Gradually Easing its Regulatory Grip


In July of 2017, the United States Securities and Exchange Commission (SEC), after an in-depth investigation into the Decentralized Autonomous Organization (DAO), announced that Initial Coin Offerings (ICO) may now be regarded as official securities. Ever since then, the SEC has been putting up different rules, recommendations and warnings for potential stakeholders and investors regarding ICOs. This is happening even as ICOs might generally be a bit less trendy than Security Token Offerings (STOs).

At first, the SEC’s pronouncements were generally regarded as a means to reveal how easily these ICOs could be used deceitfully and eventually become quite unsafe. Sometime in July of 2017, it published an article on its website, titled “Investor Bulletin: Initial Coin Offerings.” This article ended with a few points investors are to look out for and was called “potential warning signs of investment fraud.”

They include unlicensed sellers, sounding too good to be true, unsolicited offers, guaranteed high investment returns and undue pressure to make an immediate purchase. However, it would seem like the SEC is a bit more unbiased with ICOs and currently refers to it as a legit and properly reputable part of the general financial scenery.

Generally, the cryptocurrency industry is pleased with the SEC’s current position regarding the offerings. Nevertheless, there are still people who believe that a more lucid description of the SEC’s guidelines is very necessary. This is because, for many, there are still quite a few complicated areas in the SEC’s categorization of cryptocurrencies that need clarification. Even the Blockchain Association has said there’s a “growing sense of urgency” for these clarifications to be made quickly.

The SEC’s Existing Rules

Another reason why there is considerable satisfaction for the SEC’s renewed “faith” in ICOs and cryptocurrencies in general is that the commission has recently started putting these guidelines out on their official social media accounts. This is considering the fact that the current guidelines have existed since the March of 2018.

Going through the guidelines, anyone can easily see that there is little or nothing new regarding ICOs, especially if the reader isn’t new to the sector. However, it is believed that the demonstration of the information as simple and easy to understand might suggest that the SEC has a new found regard for the sector as there is now a large number of potential customers, stakeholders and investors who are looking to use cryptocurrencies for many different needs. Due to this, the SEC may have felt obligated to simplify the information into five major nuggets.

They are:

“ICOs can be securities offerings. ICOs, based on specific facts, may be securities offerings, and fall under the SEC’s jurisdiction of enforcing federal securities laws.”

This may be a warning to potential investors that an ICO falling under the jurisdiction of the SEC would be subject to any related federal securities laws.

“They may need to be registered. ICOs that are securities most likely need to be registered with the SEC or fall under an exemption to registration.”

This is also another regulatory point that mandates ICOs to first register with the SEC or be able to qualify for exemption if specific conditions are met. Basically, any ICO that doesn’t meet this requirement should be deemed illegal.

“Tokens sold in ICOs can be called many things. ICOs, or more specifically tokens, can be called a variety of names, but merely calling a token a ‘utility’ token or structuring it to provide some utility does not prevent the token from being a security.”

This is a simple cautionary statement that the name of a specific token however unusual, does not affect its classification by the SEC, as a security.

“ICOs may pose substantial risks. While some ICOs may be attempts at honest investment opportunities, many may be frauds, separating you from your hard-earned money with promises of guaranteed returns and future fortunes.”

This is another warning for investors that many ICOs might be extremely fraudulent and could be geared to rip investors off. It also states that some tokens could easily be stolen, hacked or influenced in terrible ways.

“Ask questions before investing. If you choose to invest in these products, please ask questions and demand clear answers.”

This last one urges potential investors to exhaust all possible questions and make sure they are completely satisfied with responses before investment is concluded.

There are also a few extra pieces of advice for all potential stakeholders that go deeper into the main guidelines. These basically encourage investors to do substantial research about the companies running the ICOs, about how the tokens will be bought and sold and about whether these tokens will be sold in jurisdictions that are outside that of the SEC.

The SEC has encouraged individuals and companies alike to follow all stipulated rules which include protecting the interests of their customers and making sure companies – especially cryptocurrency exchange companies – register appropriately.

Reaction to the Guidelines

The director of external affairs for the Blockchain Association, Kirstin Smith, has expressed some pleasure with the SEC’s guidelines but still maintains that a few clarification regarding some tokens, might be needed.

According to Kristin:

“It’s helpful that the SEC has been clear that organizations using tokens to raise funds must comply with securities laws, but the nature of these projects means that there is still a grey area for some tokens. We think that makes a lot of sense that some tokens be treated as securities because it helps close the information gap between investors and creators of a project. It’s a complex environment, so having some clarity on that issue is key.”

The SEC’s Previous Position Compared with its Current

As expressed earlier, the SEC’s current guidelines puts the entire cryptocurrency sector at rest because it seems the commission has eventually softened its grip. This is particularly interesting because before now, the cryptocurrency sector was largely seen by the commission as unsafe, unstable and also very fraudulent.

For example, sometime in early 2018, Jay Clayton, chairman of the commission, expressed his displeasure at the amount of fraud that supposedly permeated the sector. He also commended specific actions by officials of the United States and Canada, for all their work in trying to eliminate cons in the sector.

Clayton, at the time, said:

“The fraudsters flocked to the new and attractive space. I guess that shouldn’t surprise me, but it does — and the amount of fraud that exists and has existed in the penny-stock space.”

When comments like that were made at the time, many stakeholders were convinced that the SEC saw nothing good with the sector and its ICOs. It was generally believed that the commission simply concluded that charlatans had infiltrated the sector and were only interested in ripping investors off.

There was an Investor Bulletin published sometime in July of 2017 that basically highlighted all the main points the current guidelines mention but still found a way to end the publication by concentrating specifically on scams:

“If fraud or theft results in you or the organization that issued the virtual tokens or coins losing virtual tokens, virtual currency, or fiat currency, you may have limited recovery options. Third-party wallet services, payment processors, and virtual currency exchanges that play important roles in the use of virtual currencies may be located overseas or be operating unlawfully.”

Just a month later in August, the commission published an Investor Alert that also seemed to be really focused on ICO fraud and seriously warned potential stakeholders about different “manipulation schemes.”

“The SEC’s Office of Investor Education and Advocacy is warning investors about potential scams involving stock of companies claiming to be related to, or asserting they are engaging in, Initial Coin Offerings (or ICOs). These frauds include ‘pump-and-dump’ and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies.”

However, throughout last year, the commission seemed to progressively relax its apprehensive outlook on the sector. This is despite the fact the SEC probed twelve token sales in the year before November 2018 and also shut down a good number of ICOs. This relaxed approach can be seen not only in the current guidelines but also in different announcements made by some of the commission’s representatives and personnel.

Smith, for example, said:

“In general, the SEC has taken a measured approach as they assess how to regulate crypto tokens. As an industry, we think a couple of recent speeches set the right tone: Director Bill Hinman spoke on the topic of decentralization last June and Commissioner Hester Peirce gave a general assessment of regulatory issues earlier this month.”

What Smith might be referring to here, is a statement by Peirce, expressing her belief that the commission’s slow approach in announcing simple and easily understandable rules, might just be what the industry needs to grow on its own, while adjusting its operations as necessary. Popularly called the “Crypto Mom”, Peirce is one of the officials at the SEC, regarded as very positive towards the sector. Regardless, her statement might just be the proof that stakeholders need about the commission’s interest in the industry.

Possible Reason for the SEC’s Relaxed Approach

Over the last few months, the entire crypto markets even though they haven’t exactly soared, have been somewhat stable. This might be a reason why the SEC isn’t so critical of the sector. However, one might wonder what the SEC’s reaction would be if things start to become as volatile as it once was.

Another possible reason is that recent research by Marketwatch has shown that there was a 550 percent surge in the number of institutions who applied to the SEC for some approval or the other, to carry out token sales. This may have caused the SEC to relax its approach as it would seem to them that the sector is a legit one.

Reactions to the SEC’s Guidelines

The majority of the sector’s stakeholders still believe that a lot of elucidation is required even with the simplicity of the guidelines. Some have even argued that the simplicity with which the commission presented its guidelines deliberately avoids certain arguments.

According to Smith:

“We do urgently need additional, detailed guidance on how tokens that we used in decentralized networks should be classified. There’s a strong argument that they shouldn’t be considered securities. This is the biggest question that the industry and regulators are grappling with today.”

Even though the SEC has stated that some cryptocurrencies including Bitcoin and Ethereum may not be classified as securities, Smith still argues that this isn’t enough and there needs to be more guidance.

“These speeches are not formal guidance and there remains a growing sense of urgency that we need to answer the outstanding questions soon, because that lack of clarity is preventing developers from pursuing projects here in the United States. The questions before the SEC are very complex. Their position has become clearer over time, but there are still outstanding questions that need to be answered.”

Speaking on the SEC’s current approach, Chairman of CryptoUK – Iqbal V. Gandam – had this to say:

“I think the approach is balanced. They [the SEC] have not said that they are a poor/risky investment, but simply stated that the investor needs to be cautious – as is true with other investments. I also do not feel they view all crypto to be securities. They have linked to a recent hearing/article which highlights a particular crypto [the 2017 DAO investigation] and how it was deemed to be a security. So again being cautious but at the same time giving freedom to token creators.”

Gandam’s opinion suggests that the SEC’s current guidelines will still give the sector the chance to grow properly. However, others believe that if the SEC publishes a more in-depth and detailed set of rules and guidelines, it will help the sector grow and develop even better and faster.

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