The New SEC Proposal Could Actually Hinder Crypto: Here’s Why

Earlier today, a commissioner at the US Securities and Exchange Commission (SEC) revealed a proposal that would allow some blockchain startups exemption from current securities regulations. The regulatory change would give crypto asset companies a three year period in which they could prove themselves sufficiently decentralised to pass a Howey test.

Many crypto industry observers have greeted the proposal with optimism. However, some believe it threatens to unleash another wave of ICO mania that would ultimately hurt the industry.

Are US Regulators Stifling Crypto Innovation?

As widely reported, Hester “Crypto Mom” Pierce announced the proposal during a speech at the International Blockchain Congress held in Chicago today.

1/ 🚨BREAKING🚨: SEC Commissioner @HesterPierce today publicly proposed a safe harbor for token sellers building decentralized networks.

It is an elegant solution to the most complex legal challenge of this crypto era.

Thread is go.👇

— Marco Santori (@msantoriESQ) February 6, 2020

The proposal seeks to address an issue within existing regulations. At present, when a company issues a token and sells it to investors, most of the time, the US considers it a security offering.

Companies offering securities must be registered with the SEC so that they can be held accountable to investors. The agency defines a security as any investment of money in a common enterprise with the expectation of profit from the work of a third party.

By these standards, almost all tokens sold via an initial coin offering are securities. Pierce’s new proposal would allow companies launching ICOs a period of three years to allow the network to evolve into a state of sufficient decentralisation that it no longer relies on the entity that created it.

An example of such a network might be Ethereum. Although clearly sold in a centralised token sale, years later it exists without need of its founders. In fact, the SEC itself has previously stated that Ether (ETH) is not a security.

Pierce, and those supportive of the proposal, believe that such a regulatory change would encourage innovation. Many reason that if Ethereum had received greater attention in its early days, its token sale may have been deemed a security offering and the network may not exist as it does today.

Would Such a Change Prompt ICO Craze 2.0?

Although many have responded to the proposal positively, not everyone agrees with it. Some observers do not believe that the change would benefit the crypto industry.

Amongst them is Satoshi Roundtable host and CEO of Chainstone Labs, Bruce Fenton. In a Medium post published earlier today, he outlined his own criticisms of Pierce’s “safe harbor” proposal.

My thoughts on The New SEC Safe Harbor Propsal

Not a fan – it seems a bad idea

– it could solve some issues and offer benefits
– several potential drawbacks & may not be the best focus
– Do you agree?
please read the article & share your thoughtshttps://t.co/1ji2LZ0hJw

— Bruce Fenton (@brucefenton) February 6, 2020

His chief objection is that such a proposal risks unleashing another wave of questionable fundraising. He comments on the ICO mania of 2017, saying that companies would simply raise money and focus on the safe harbor period as opposed to delivering value to investors.

He argues that truly decentralised projects do not need either a premine or a fundraiser and that most of them are actually unsuccessful. The CEO makes the point that if companies are raising money from investors then of course they should be responsible to their financiers, rather than entirely aloof from regulation.

In fact, he goes as far as to suggest that tokens that have avoided the Howey test (the judge of whether something is a security or not) are usually very bad investments:

“Most decentralized tokens therefor [sic.] are destined to be poor investments — gift cards to a store no one wants to shop at.”

Related Reading: Ethereum’s “Bullish Wave” May Turn Parabolic Once This Technical Event Occurs

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