Which Regulator is Next after SEC Eyes ICOs? | Bank Innovation

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Now that the Securities and Exchange Commission (SEC) has established that it will keep an eye on ICOs, the question remains: will other regulatory bodies follow?

Early last week, the SEC released a report iterating that the DAO violated the law for failing to register its cryptotokens as securities. The SEC’s statement is its first formal declaration on the topic of ICOs and could possibly be a harbinger of other regulatory bodies soon to take note of the space.

The issue, explained Daniel Kahan, associate at law firm Morrison & Foerster, to Bank Innovation, is that there is “no such thing as a monolithic token.”

This raises questions about tokens not tied to financial returns. For example, there are utilities or app tokens, which trade in exchange for goods and services.

“These app tokens are more like airline miles than securities,” said Alfredo Silva, partner at Morrison Foerster. “So just because a token isn’t a security, doesn’t mean that it’s free from complying with consumer protection laws, laws related raffles and lotteries, task implications or for that matter the Commodity Futures Trading Commission (CFTC).”

The obvious open-endedness of the SEC’s report raises the question of where other entities such as the CFTC or Financial Industry Regulatory Authority (FINRA), among others, might fit in.

A common point of confusion following the SEC’s report, Joshua Ashley Klayman, of counsel & head of Morrison Foerster’s Blockchain & Smart Contracts Group, said is “even though the SEC acknowledged that some tokens look and act like securities, it didn’t say which tokens do not.”

So take the example of the app token that, on the surface, has more in common with airline miles than it does with a security.

“These tokens trade for goods & services, which makes them assets,” Silva said. “But that isn’t to say you can’t securitize an asset. It’s totally standard to make derivatives out of assets. So, it’s hard to say what qualifies as a security and what does not.”

Another question raised by the SEC’s report is the impact on innovation.

“There’s  a lot of concerns [around] if the SEC guidance is going to drive ICOs and innovation out of the U.S.,” Klayman said. “It’s not. The report is basically establishing this is not the Wild West, and if you want to get involved in this space, then there will be regulating.”

In fact, Kahan argues, the report doesn’t impede ICO innovation, but instead encourages larger financial institutions and other players to get into the picture. The only people negatively affected by this are the ones consciously looking to engage in fraudulent or roundabout techniques of raising money without being held accountable, Kahan explained. “And this is a small group of people anyways.”

For those concerned that the report will drive ICOs out of the U.S., Klayman suggests that countries like Switzerland and Singapore, which have sandbox rules to allow such ICOs, are “very likely” to follow suit.

“The idea that any company can take their stock and transfer it to this digital ledger and then escape all compliance is absurd,” Silva said.

“It’s not like Singapore wants to be the Wild West,” Kahan said. “In fact, they are even more protective of investor rights than the U.S. It’s only a matter of time that they come around.”

The SEC’s report comes a year after the DAO was hacked for millions of dollars. It is important to note that SEC did not provide commentary on any other specific tokens except for the DAO. And even after stating that the DAO violated the law by not registering with SEC, it declined to pursue action. This action of inaction has many wondering that even if it decided to pursue action, how would it? Would it even be able to find a specific person or group to go after?

Silva declined to speculate on the DAO case specifically, but said that if the SEC wanted to pursue action in a case like this, it could go after trading platforms, broker dealers, venture capitalists that facilitated investments or advisers.

“Basically, whoever in the U.S. that has their name attached to this, that’s who they can go after,” said Silva. “The SEC report has put the whole ecosystem on warning. The SEC is saying we don’t care if it’s a decentralized autonomous organization, if the securities are purchased with actual dollars or cryptocurrency. The point is the SEC has taken notice of this phenomenon and will continue to keep an eye on it.”

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