Digital Currencies Classified as Securities by the SEC
In a significant move, the Securities and Exchange Commission (SEC) has declared that digital tokens used in Initial Coin Offerings (ICOs) are securities under federal law, a decision that carries substantial implications for the cryptocurrency market and ICO issuers in the United States.
1. **Tokens as Securities:** The SEC's ruling clarifies that tokenized securities, despite their blockchain-based format, remain subject to the same federal securities laws as traditional securities[1][3]. This means that digital tokens offered in ICOs must comply with stringent disclosure and registration requirements unless exempt.
2. **Regulatory Compliance:** Issuers of ICO tokens that qualify as securities must adhere to extensive disclosure and registration requirements, including filing with the SEC, providing transparent information to investors, and following anti-fraud provisions[1].
3. **Impact on Tokenization Projects:** The SEC's stance underscores that blockchain technology does not alter the fundamental nature of the underlying asset. Projects attempting to "tokenize" assets must still consider securities laws, potentially limiting some novel token issuance methods unless appropriately registered or exempted[1].
4. **Enforcement and Guidance:** Commissioner Hester Peirce, leader of the SEC’s Crypto Task Force, encourages project sponsors to engage with the SEC proactively to seek necessary relief or exemptions. This suggests the SEC is open to dialogue but remains firm on regulatory compliance[1][3].
5. **Broader Regulatory Landscape:** The ruling fits within a broader push by legislators and regulators to clarify digital asset oversight, as seen in the pending CLARITY Act, which delineates SEC and CFTC jurisdiction over digital assets and introduces frameworks for stablecoins and dual registration of intermediaries[2][4].
Meanwhile, the Russian Finance Ministry has published a new draft law "On Digital Financial Assets," aiming to strictly regulate cryptocurrencies and ICOs. Under the new bill, all trading of cryptocurrencies in Russia will be done via registered cryptocurrency exchanges. However, like the SEC, the Russian authorities have not specified which ICOs are securities, with decisions made on a case-by-case basis.
The SEC's ruling may deflate the growing ICO bubble in the United States, but it does not prevent businesses from pursuing them overseas. This development comes as the price of Bitcoin and Ethereum, two popular digital coins, fell 10% today, with more market volatility expected ahead. Last week, Tezos, a new blockchain project, raised $232M, making it the largest ICO to date, while a browser startup raised $35M in under 30 seconds through an ICO.
Despite the regulatory challenges, the potential for ICOs to raise vast sums of money in a short period continues to attract entrepreneurs and investors alike. However, the increased regulatory scrutiny is expected to slow ICO activity, bolstering investor protections and market integrity[1][3][4].
[1] - SEC Press Release, https://www.sec.gov/news/press-release/2017-131 [2] - CLARITY Act, https://www.congress.gov/bill/115th-congress/house-bill/4377 [3] - SEC Speech by Commissioner Hester M. Peirce, https://www.sec.gov/news/speech/peirce-crypto-securities-062118 [4] - CoinDesk, https://www.coindesk.com/clarity-act-sec-cftc-jurisdiction-over-digital-assets-explained
- The SEC's decision, deeming digital tokens in ICOs as securities, implies that the financial landscape for businesses involved in this sphere must comply with federal securities laws[1].
- As a result of stringent disclosure and registration requirements that apply to securities, technology-driven businesses offering digital tokens through ICOs should be mindful of the regulatory impact on their technology-based projects[3].
