While regulators in DC are still scrambling to decide whether cryptocurrencies are money, equities, securities, commodities, or property, the ICO boom continues unabated at a clip of more than $1 billion a month - blowing past conventional venture capital as a funding source for startups.
At issue in Congressional hearings is whether the tokens offered by ICO ventures are defined as securities in the lexicon of the SEC.
The regulatory hoop that token issuers must jump through is that of utility value - the token must have a use case within the ecosystem of the particular ICO blockchain - rather than simply offering equity or a way to speculate on the future value of the project.
Watch Peter Van Valkenburgh, Director of research for Coincenter, explain the nuances of token offerings to the Congressional Financial Services Committee on March 14th:
Piercing The Veil
Even if such a utility value is clear cut, traders and speculators can pierce that thin legal veil by simply buying and selling tokens in the expectation of making money - in which case even a utility token could be classified by the SEC as a security.
In this ambiguous regulatory environment many ICOs seek refuge in regulation D, which limits sales to accredited investors — those with a net worth of more than $1 million and income of greater than $200,000 per year.
However, even under regulation D there is a 12-month lock-up period during which time tokens cannot be sold. And currently there are no registered broker-dealers in the United States who are licensed to sell security tokens.
Watch Mike Lempres, Chief Legal & Risk Officer for Coinbase, explain that not all tokens are alike.
Putting The Kibosh On Innovation
So the next problem becomes one of liquidity - even after the accredited investors hold their security tokens for the requisite 12-month period, they will have no place to sell them.
In this way, regulators in DC are stifling innovation by shoehorning this creative new method of raising capital into current US securities laws - effectively putting the kibosh on two of the most valuable, innovative, and appealing features of ICOs: giving investors a vested interest in the project’s blockchain ecosystem and allowing them to profit from speculation on the value of tokens.
This regulatory shoehorning is shortsighted because there are incredibly creative innovations going on within the blockchain ICO space and blindly ignoring the nuance of innovation, and labelling all of them “securities" will inevitably drive valuable projects overseas. As Dave Bean of Earn.com, which distributes air-dropped tokens noted:
Geo-filtering is becoming a popular feature
There is a need for SEC to redefine parameters surrounding ICOs in order to ensure the US regulatory framework is not stifling innovation and in a way that sends a clear green light to creative, industrious, innovative blockchain development teams who will keep the US in a competitive position in this nascent, rapidly growing marketplace.
As Lempres put it to members of Congress:
If the U.S. does not provide a clear, thoughtful regulatory environment, the investment can move very quickly to other countries
- Mike Lempres, Chief Legal & Risk Officer for Coinbase
Watch Robert Rosenblum, Partner at Wilson, Sonsini, Goodrich, & Rosati, a Silicon Valley law firm which handles numerous ICOs, explain that SEC needs to modify its rules so as to foster innovation in the ICO space
Images via Shutterstock, Video clips via Youtube