America’s Securities and Exchange Commission (SEC) released a statement on July 25 highlighting their stance towards initial coin offerings (ICOs).
In that statement, the SEC recognized the increasing popularity of ICOs and token sales, and claimed that some ICOs were valid and lawful investment opportunities. However, they cautioned that ICOs were being used to improperly entice investors with the promise of high returns.
One industry analyst called the statement the “end of the beginning” for blockchain technology. That industry analyst is Cornell University Professor Emin Gun Sirer, who made headlines last year for being the first to spot security holes in the DAO before its collapse.
Sirer, in an interview with CoinDesk, described how the SEC’s statements could have a similar effect to the collapse of the DAO in terms of the industry impact. He believes it will have a “chilling effect” on innovation in the short-term. In the long-term, however, he expects the ruling to usher in a new, more sustainable era of product development.
Another industry analyst described how the sun “may be setting – or at least dimming – on a Wild West of blockchain-powered finance.”
What does the SEC’s statement actually mean for the blockchain industry? Let’s take a closer look at how it affects you.
The Basics Of An ICO
ICOs, or initial coin offerings, occur when a company seeks to raise capital by distributing blockchain-based tokens. You buy a token, then receive a share in the company. Your rights as a token-holder vary between companies.
Since the start of 2017, dozens of projects have raised over $1.3 billion through ICOs.
Critics have accused the market of being in a bubble, while others see ICOs as a democratization of the venture capital industry – similar to how Kickstarter and other crowdfunding platforms have been operating since 2009.
Meanwhile, the laws see blockchain tokens as a blend between securities and currencies. They don’t fit into our traditional legal framework, and there aren’t a clear set of financial rules regarding their distribution.
What Will The SEC Do?
The most important thing you need to know about the SEC’s latest statement is that they didn’t say anything surprising. It’s no secret that America’s Securities and Exchange Commission wants to regulate activities involving securities (digital tokens) and exchanges.
The SEC maintained that it believes digital tokens are securities. Sure, they might not function like traditional securities – but for all intents and purposes, these companies are selling securities.
The SEC statement also singled out one ICO in particular: the ICO for the DAO. In 2016, investors bought into the DAO and raised more than $100 million in Ethereum cryptocurrency. Soon after, a thief stole tens of millions of dollars of the digital currency. The founders of Ethereum were forced to create an entirely new version of their network to roll back the theft.
In the SEC’s statement, they describe how the DAO’s crowdsale constituted the sale of unregistered securities. However, the SEC has not decided to pursue charges against the creators of The DAO.
The majority of the SEC’s statement, however, was designed to protect investors. It gave investors tips on how to spot scams and avoid bad investments.
The first “tip” is to make sure the ICO is registered with the SEC.
How To Avoid Bad ICOs, According To The SEC
- Before buying digital tokens, make sure the organization or individual selling those tokens is registered with the SEC
- Ask how your money will be used, and know what rights you have as a virtual token holder
- If the virtual token or coin is a security, then federal and state securities laws require investment professionals and the firms offering the securities to be licensed or registered
- Ask whether the blockchain is open and public, whether the code is open source, and whether the company has had an independent security audit
- Learn how to see through jargon-laden speeches, hard sells, promises of oversized ROIs, and other telltale signs of an investment scam
- Educate yourself on the dangers of virtual currency exchanges and other entities holding virtual currencies, virtual tokens, or coins
SEC ICO Conclusion: Should You Be Worried?
Ultimately, blockchain tokens are not strictly securities, nor are they strictly currencies. They’re new investment vehicles and stores of value. Laws weren’t written to anticipate something like blockchain-based digital tokens.
What does this really mean for the future of ICOs?
We’ve already seen a large number of crowdsales block American users from purchasing tokens. We expect to see more of that activity moving forward. Companies wish to protect themselves from being sued.
Eventually, the SEC will release a set of regulations and guidelines governing the use of cryptocurrencies. However, today is not that day.