SEC draws hard line between cryptocurrency and digital assets
This is a cryptocurrency. And that's a security. See the difference?
US-based cryptocurrency startups have been wanting more regulatory clarity around cryptocurrency for a while. They just got some, with SEC head Jay Clayton drawing a line between cryptocurrency and digital asset tokens, and firmly stating that ICOs would not be exempt from traditional securities rules.
The difference comes between the coins designed to replace money, such as bitcoin, and those designed to make a return on investment for buyers through related ventures.
"Cryptocurrencies: These are replacements for sovereign currencies, replace the dollar, the euro, the yen with bitcoin," Clayton said. "That type of currency is not a security."
"A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say 'you can get a return' that is a security and we regulate that. We regulate the offering of that security and regulate the trading of that security."
There are naturally some grey areas. But when in doubt, ask the SEC.
He went on to urge startups to seek regulatory guidance if needed.
"If you have an ICO or a stock, and you want to sell it in a private placement, follow the private placement rules," Clayton said. "If you want to do any IPO with a token, come see us."
The SEC is "happy to help you do that public offering" if issuers take the responsibility SEC laws require, he said.
The willingness to get involved, and eagerness to learn, mirrors previous unofficial statements from SEC officials which emphasised that although the SEC doesn't want to constrain innovation, it does have a duty to protect consumers.
Clayton clarified that the existing definition of a security would not be modified, and that the Howey Test would continue to serve as the broad indication of whether or not an offering is technically a security.
"We are not going to do any violence to the traditional definition of a security that has worked for a long time," he said. "We've been doing this a long time, there's no need to change the definition."
For many upcoming projects, this might be as strong a signal as any that they'll need to start getting involved more closely with regulators. And for the exchanges which aren't already well on the way, this is probably a strong sign that it's time to get that securities trading licence.
SEC officials have previously noted that the burgeoning cryptocurrency space is largely tech-oriented, which might be inhibiting it from seeking regulatory assistance where needed simply because project owners don't have the experience to know to seek it out. In contrast, the financial services industry is well used to a strict regulatory environment and is now well-used to approaching regulators for approval.
A necessary step
Clayton also took the opportunity to comment critically on the current wild west state of the ICO market.
"I am not going to change the way we approach the offering and trading of securities as a result of the fact that you put it in the form of a token," he said. "I'm protecting the integrity of the market. The behavior we see in this is pretty bad. We've got guys with bags of cash headed to the border. That's not our securities market."
Beyond the cryptocurrency markets, he also expressed concern with the current state of the public stock market, and the increasing trend of startups to seek pure venture capital and private funding, rather than going public.
"I don’t like it from a public policy perspective that we’re increasing the market for the privileged and decreasing it for ordinary investors," he noted.
In this context, a properly regulated ICO market might be part of the solution, rather than just a new problem, able to get retail investors early access to promising startups without needing to dodge a constant stream of ICO scams.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, XRB