SEC Chairman Jay Clayton wants to regulate all tokens in the cryptocurrency industry, claiming no token will be exempt from regulation.
Clayton made the comments at the Wall Street Journal’s CFO Network Conference, an invitation-only event exclusively for chief financial officers from the world’s largest and most influential organizations. The conference took place on June 11.
“It made me unhappy that people thought that by calling it a token it was somehow exempt from regulation. Let me be clear it does not,” said Clayton as reported by Wall Street crypto specialist Caitlin Long.
SEC Chrmn Jay Clayton tonight at #WSJCFO conf: “It made me unhappy that people thought that by calling it a #token it was somehow exempt from regulation. Let me be clear it does not.” I respectfully disagree with such a sweeping generalization. @WSJ #ICO #utilitytoken #blockchain pic.twitter.com/dG5cV6Ygwn
— Caitlin Long (@CaitlinLong_) June 11, 2018
Clayton explained that he wants to regulate all tokens in the cryptocurrency industry. However, Clayton has previously stated that he doesn’t believe some tokens warrant attention from the SEC because they don’t represent securities.
The SEC, as you may have guessed from the name, focuses exclusively on securities-related activities. Earlier this week, Clayton clarified that certain tokens – like bitcoin and similar payment-focused tokens – are not securities and should not be classified as such.
Understandably, Clayton seems to take issue with tokens that call themselves a cryptocurrency when they really represent a stake in a specific entity – thus making them a security.
The SEC has already cracked down on several of these token-based securities. Centra, for example, recently tried to label its token as a utility token – despite the fact that it obviously was not. The SEC reportedly put the project on its radar, which typically indicates further regulation is upcoming.
Clayton also expressed concern about the illicit schemes and scams that run rampant across the cryptocurrency industry. Cracking down on these scams will be a big priority for the SEC as it explores how to regulate the crypto industry.
One of the issues with regulating the crypto industry is that few companies and exchanges self-report to the SEC. This could impede the SEC’s efforts to implement regulation in the industry.
Are All Tokens Securities?
The SEC’s own rules state that not all tokens are securities. The SEC has clarified that there’s a difference between a security and a utility token.
The next problem the SEC faces is to set specific definitions for utility tokens and security tokens. Some tokens blur the line between each category.
Ether, DENT, Siacoin, and similar tokens are undoubtedly utility tokens, for example, because they provide access to a platform or native ecosystem, including the products, services, and apps within that ecosystem.
There’s no guarantee any of these tokens will increase in value. However, many users buy utility tokens expecting them to increase in value.
These tokens have a finite supply, and as demand rises, the price of each token is expected to rise as well. At the same time, if the ecosystem collapses, the value of each token will collapse. In this sense, users have a vested interest in the ecosystem and will profit or lose based on the performance of the ecosystem – something that could make a token a security.
Not All ICOs Are Security Sales
You can’t just sell securities to the public on a whim. All security sales need to be registered with the SEC. That’s one of the core jobs of the organization.
When a crypto company holds an ICO, is that company holding an unregistered security sale? Or are they simply selling utility tokens?
According to the SEC, you can hold an ICO and sell tokens for money without it necessarily being a security sale. Not all ICOs constitute the sale of securities. Utility tokens can be sold through an ICO, for example, and this doesn’t make a utility token a security by default.
What’s The Next Step?
The next step is for the SEC to clarify its definitions of different cryptocurrencies. What’s the difference between a utility token and a security token? At which point does a token cross the line into becoming a security token? The SEC will need to answer these questions moving forward.