{"id":22639,"date":"2018-02-06T18:20:06","date_gmt":"2018-02-06T18:20:06","guid":{"rendered":"http:\/\/ci027cfe78c00526c3"},"modified":"2018-02-06T18:20:06","modified_gmt":"2018-02-06T18:20:06","slug":"sec-chairs-written-testimony-hints-moderation-cryptocurrencies-icos-be-warned","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/business\/sec-chairs-written-testimony-hints-moderation-cryptocurrencies-icos-be-warned","title":{"rendered":"SEC Chair\u2019s Written Testimony Hints at Moderation for Cryptocurrencies, but ICOs Be Warned"},"content":{"rendered":"
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The written testimony from Jay Clayton, chairman of the United States Securities and Exchange Commission (SEC), was released on February 5, 2018. It comes ahead of the chairman\u2019s oral testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs on February 6, 2018, on the matter<\/a> of \u201cVirtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.\u201d <\/p>\n

Usually the written testimony closely mirrors the language we can expect in the oral testimony today. Going through the written testimony, there are several key takeaways to note. (If the opinions of the chairs contained in this article seem familiar, it\u2019s because they co-authored<\/a> an op-ed in the Wall Street Journal<\/em> on January 24, 2018, ostensibly laying the groundwork ahead of their testimony.)<\/p>\n

Point #1:<\/strong> IF you seek to raise capital to fund an enterprise via an ICO, the SEC views this as the offer and sale of securities, and your venture is subject to the laws governing the sale of securities. <\/em><\/p>\n

For those in the cryptocurrency world, this is bad news if the coin you are invested in is determined to be an actual security. On page 3 of his written testimony, Clayton stated:<\/p>\n

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There should be no misunderstanding about the law. When investors are offered and sold securities \u2014 which to date ICOs have largely been \u2014 they are entitled to the benefits of state and federal securities laws and sellers and other market participants must follow these laws. <\/p>\n<\/blockquote>\n

It seems Chairman Clayton believes most ICOs are unregistered securities; meaning, if they are to be considered as such, they\u2019d be in violation of state and federal laws. Clayton further evidences this supposition, noting, \u201cFor those who seek to raise capital to fund an enterprise, as many in the ICO space have sought to do, a primary entry into the SEC\u2019s jurisdiction is the offer and sale of securities, as set forth in the Securities Act of 1933.\u201d Here, Clayton is stating that ventures seeking to raise funds via an ICO should consider, as a \u201cprimary entry,\u201d registering as a security with the SEC. <\/p>\n

At the crux of the chairman\u2019s points here is an argument the industry has faced in a fundamental fashion, especially on ICOs. That argument is, as Clayton puts it on page 6 of his testimony, \u201cIs the coin or token a security?\u201d While Clayton does demur to say that the answer to his ICO question depends on the individual facts of each coin or token, he does state that \u201cto date no ICOs have been registered with the SEC, and the SEC also has not approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.\u201d <\/p>\n

How Clayton Arrives at That Point:<\/em><\/strong><\/p>\n

As a governing definition of securities, Chairman Clayton cited \u00a72(a)(1) of the Securities Act of 1933<\/a> as well as \u00a73(a)(10) of the Securities Exchange Act of 1934<\/a>. (These two Acts are two of the primary three bodies of law that outline most of the regulations of the U.S. investment industry \u2014 the third being the Investment Advisers Act of 1940<\/a>, or the \u201c40 Act\u201d colloquially.) These sections define a security as \u201cinclud[ing], among other items, \u2018an investment contract.\u2019<\/strong>\u201d According to federal laws under Title 15 of the U.S. Code, an investment contract is \u201can investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others<\/strong>.\u201d See 15 U.S.C. \u00a7\u00a7 77b<\/a>\u201377c<\/a>.<\/p>\n

Point #2<\/strong>:<\/strong> The U.S. regulators will apply the same \u201cfacts and circumstances\u201d analysis, utilizing a principles-based framework to determine if ICOs and cryptocurrency markets should be classified as securities.<\/em><\/p>\n

This is a potential sigh of relief for the cryptocurrency industry. If the chairs remain steadfast on this point, it appears that any crackdown on different coins will come in piecemeal fashion and on the merits of the coins individually, rather than from a broad-swept ruling. Referring in his testimony to a report issued<\/a> on July 25, 2017, on DAO tokens as a test case, the chair seems to suggest the methodology for determining that DAO tokens are securities should be allegorized to other coins or tokens offered in the space. <\/p>\n

Going further on page 7 of his testimony, the chair states that \u201cthe Commission\u2019s message to issuers [those who conduct the ICO] and market professionals in the space was clear: those who would use distributed ledger technology to raise capital or engage in securities transactions must take appropriate steps to ensure compliance with federal securities laws.\u201d<\/p>\n

Point #3: <\/em><\/strong>We are doing this in the name of \u201cInvestor Protection.\u201d<\/em><\/p>\n

This is the preemptive Fear, Uncertainty and Doubt (FUD) propagating line that is being towed about by every regulator safeguarding an economy more prosperous than North Korea\u2019s. However, the point that Chairman Clayton makes on cryptocurrencies is not without merit. <\/p>\n

Specific types of investor protection that the new application of the current regulatory framework to cryptocurrencies hopes to improve on include:<\/p>\n