Throughout their short history, cryptocurrencies have treaded a fine line when it comes to the Securities and Exchange Commission (SEC). As decentralized currencies, they have not been automatically subjected to the rules and regulations of governmental agencies like the SEC. However, that might be changing: the SEC released a report last week suggesting that ICOs, the initial coin offering token sales that have fueled the launches of many new startups in the past several months, are, in fact, subject to securities laws. What’s more, the commission found that one particular multimillion-dollar ICO from 2016 has violated some portion of those laws.
Ethereum-Powered ICOs as the New Crowdfunding
The ICO craze has taken off in the past several months. These offerings make use of the Ethereum blockchain and its smart contracts to raise ether in exchange for specific “tokens” in a new company. ICOs have raised millions of dollars for new companies in seconds, even in some cases in which the companies don’t necessarily have a product or app on offer at the time of the ICO. There has already been concern among financial institutions and analysts that some companies might be taking advantage of customer interest in the new fundraising format, cashing out their ether for fiat currency without necessarily providing any return on investor funds.
SEC Steps in to Classify
The SEC’s new report classifies that tokens, at least in particular cases, are currencies, according to reporting by The Verge. The report points in particular to the Decentralized Autonomous Organization’s (DAO) ICO from last year, concluding that DAO tokens are, in fact, securities. Given this classification, the SEC found that the DAO violated section 5 of the Securities Act when it failed to register with the Commission. At this stage, the SEC has declined to pursue any action against the DAO or the startup behind the project, Slock.it, although it does not offer any explanation for why it has avoided enforcement in the recent report.
Perhaps one reason why the SEC will not attempt to enforce action against the DAO is that the decentralized organization is a bit difficult to pin down. Who exactly would the SEC go after, anyway? The SEC report suggests a number of possible “intermediaries,” any of which could potentially be involved or incriminated.
The SEC’s report confirms that the tokens sold in the ICO in question do meet the legal definition of a security, indicating that “investors who purchased DAO Tokens were investing in a common enterprise and reasonably expected to earn profits through that enterprise when they set ETH to the DAO’s Ethereum blockchain address in exchange for DAO Tokens.” Beyond that, investors in the ICO were given limited voting and ownership rights over the company.