The SEC has been signaling its intentions to start regulating cryptocurrency exchanges in the near future – similar to what just happened in China.
The People’s Bank of China recently shutdown cryptocurrency exchanges, including certain bitcoin exchanges and initial coin offerings, or ICOs. Exchanges will need to shut down in the near future, while ICOs are being forced to return all money to investors.
Analysts believe that the United States Securities and Exchange Commission, the SEC, could take similar action in the future.
It’s no secret that the SEC is aware of ICOs and their problems. The organization has made several moves throughout the last few months.
The SEC’s latest statement involved issuing a warning to consumers about the potential for ICO scams – although it stopped short of issuing specific regulations or recommendations.
Meanwhile, Jay Clayton, Chairman of the SEC, has voiced his concern about the lack of knowledge among ICO investors, stating that they don’t fully understand the “substantial risks” associated with initial coin offerings.
The SEC crackdown could even extend to well-known crypto-supporting celebrities, including names like Floyd Mayweather [Here and Here] and Jamie Foxx. Both men have been promoting ICOs across social media in recent weeks. If token sales are considered to be a sale of unregulated, unregistered securities, then those who promote ICOs could face legal trouble.
The Howey Test Means Token Sales Are Unregulated, Unregistered Security Sales
In 1946, the US Supreme Court announced their decision in a landmark legal case versus W.J. Howey Co. That decision led to the formation of a test, known as the Howey test, to determine whether an investment vehicle – or an instrument – qualifies as an “investment contract” for the purposes of the Securities Act.
Basically, the Howey test states that an instrument is considered an investment contract if there’s: investment of money from an expectation of profits arising from a common enterprise depending solely on the efforts of a promoter or third party.
That’s the type of legal precedent that could cause ICOs and token sales to become regulated and registered in the future.
Obviously, there’s precedent for a decision like this. China recently cracked down on ICOs, and demanded ICOs return money to investors and close. Chinese officials have also demanded that several major bitcoin exchanges in the country must close, with officials also stating that peer-to-peer trading would not be tolerated – so cryptocurrency users can’t trade digital tokens between themselves outside of an exchange.
Meanwhile, the “Great Firewall of China” will block all foreign exchanges, effectively blocking Chinese investors from the cryptocurrency revolution – at least for the near future.
Of course, other people see it as a big ploy by the Chinese government: they want to damage the reputation of cryptocurrencies before introducing regulation.
Some even argue that the Chinese government has its own digital currency in development to replace the Yuan, and that replacement currency would be the only legal digital asset in the country.
The Rise of SEC-Compliant Exchanges
You don’t have to wait long to start trading on an SEC-compliant exchange. It’s already here. The Stokens Exchange is an SEC-compliant exchange platform that requires full KYC/AML verification for membership. The exchange only lists tokens deemed legal by the SEC and other global regulating bodies where members reside.
Ultimately, many tokens are seeking to avoid regulation entirely by categorizing themselves as “utility tokens”. Utility tokens are used to interact with the platform. Companies claim they’re not an investment. However, since tokens are openly traded on exchanges, the value of a token can be expected to go up in conjunction with the value of the company – which would stray into “investment contract” territory.
We’re living in interesting times for the cryptocurrency world. Stay tuned for more information about the SEC’s future crackdown.