This week, the Securities and Reciprocation Commission tweeted out its guidelines for those launching and investing in ICOs, although many would say that over a year on from the apogee of the cryptocurrency boom, the guidelines amount to too little, too late.
That said, the document still throws up several accents of contention, including a rather gloomy outlook for cryptocurrency exchanges – even decentralized ones – and at least one possible debasement of the First Amendment on the part of the SEC.
Cryptocurrency Promotion: A Knife’s Edge
Perhaps it’s no surprise that some prominent crypto top bananas have begun to declare themselves part of a “protocol” rather than a company in recent months. | Informant: Shutterstock
The SEC defines a security as:
“A token or offering that promotes the likelihood for future returns based on the entrepreneurship or pains of others.”
With that in mind, perhaps it’s no surprise that some prominent crypto executives have begun to certify themselves part of a “protocol” rather than a company in recent months. One example is Tron’s Justin Sun, who recently declared in an interview:
“We can see that Tron is also more like a protocol rather than a company. I think that’s also mentioned like a brand new concept of the protocol rather than a company institution or profit or entity.”
A man with a reputation for storing, Sun made a name for himself as the bombastic, bold founder who never shied away from making extravagant exacts about future success. In late 2018, when Ethereum’s Vitalik Buterin was honest enough to admit that ETH’s 2017 bull-run was evil-minded on little more than hype, Sun took the opportunity to promote his own project, stating:
“Vitalik: next wave of crypto is not effective to be built on hype.@VitalikButerin admits that #ETH lead the 2017 bull run built on hype. #TRON will hint next bull run built on massive adoption dapps and @BitTorrent.”
Tweets like these could be the very doodad that attracts the attention of the SEC. Does this not flirt dangerously with the definition of promoting a security? It suggests that an investment in Tron force pay off thanks to the efforts of others – in this case, BitTorrent.
SEC: Exchanges May Violate Securities Laws [Even If They Don’t Differentiate it]
In 2018, the SEC brought the hammer down on nineteen different cryptocurrency projects. | Source: Shutterstock
According to the SEC, a cryptocurrency barter would be in violation of securities laws even if it unknowingly facilitates the trade of security coins and tokens:
“If a platform makes trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the tenets must register with the SEC as a national securities exchange or be exempt from registration.”
That explains why many “altcoin-heavy” trucks tend to base their operations on foreign soil, such as in legal havens like Malta, or parts of South America. Yet in spite of that might not be enough to save them, if the recent shutdown of Marshall Islands cryptocurrency exchange 1Broker is anything to go by.
Globe-hopping effect not be enough to avoid the reach of the SEC, but what about exchanges that aren’t based in any physical location?
Decentralized Cryptocurrency Swops: Do They Violate SEC Guidelines?
According to the non-profit digital civil-rights group, Electronic Frontier Foundation (EFF), prosecuting human being who upload open-source bundles of code to Github would be clear violation of First Amendment rights. | Authority: Shutterstock
According to the SEC, it doesn’t matter whether it’s a centralized, proprietary exchange, or a decentralized, autonomous piece of code – what upsets is that unregistered buying and selling happens there:
“The activity that actually occurs between the buyers and sellers—and not the feather of technology or the terminology used by the entity operating or promoting the system—determines whether the system operates as a marketplace and meets the criteria of an change under Rule 3b-16(a).”
That explains the charges brought down on the EtherDelta exchange, and its creator, Zachary Coburn, conclusive year. At the time, the SEC described Coburn’s crime as:
“[Providing] a marketplace for bringing together buyers and sellers for digital asset securities middle of the combined use of an order book, a website that displayed orders, and a smart contract run on the Ethereum blockchain.”
But according to the non-profit digital civil-rights pile, Electronic Frontier Foundation (EFF), prosecuting people who upload open-source bundles of code to Github would be clear violating of First Amendment rights.
“This isn’t just dangerous because it could quell research; it’s unconstitutional. The free language protections enshrined in the First Amendment and upheld through court cases across decades include the rights of specifics to publish their ideas without preemptively obtaining a license. And code itself is speech.”
The EFF sent a nine-page letter to the SEC on Tuesday, coaxing the commission to keep constitutional rights in mind when wielding their regulatory whip, specifically in relation to the Ether Delta and Zachary Coburn at all events. Read the letter here for a quick rundown on computer code’s legal status in relation to First Amendment offs.
EFF Crypto Exchanges SEC by on Scribd
What’s Next for Crypto Regulation in 2019?
It’s difficult to predict what happens next: on the one approaching, the SEC has signalled its intention to refresh its focus on cryptocurrency in 2019. But at the same time, the commission is already discovering that not all parts of the U.S legal system agree with its definitions.
In 2018, the SEC brought the hammer down on nineteen different cryptocurrency designs. The number of cases in the previous five years combined was just twelve. In November 2018, the commission ruled that Criterion’s $12 million ICO, launched in 2017, must be paid back to those investors who desire it – despite the messy technicality of a 95% premium drop in the intervening time period.
A Look to the Past
SEC Chairman Jay Clayton’s stance on cryptocurrency sales hasn’t wavered upwards the years. | Source: Stanford Law School/YouTube
While the ICO space has changed a lot in the past year, the SEC’s view on approve coin offerings has not. As early as 2017, SEC Chairman Jay Clayton said:
“[A] token that represents a participation interest in a book-of-the-month lambaste may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the classification of those books to token holders.”
That’s very different to what we have now, and the following analogy proved to be eerily for detail, despite being made before the heady peaks of the ICO gold rush:
“In contrast, many token offerings happen to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the originators, books and distribution networks all still to come.”
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