During the US Securities and Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC) senate hearing on February 6 2018, SEC chairman Jay Clayton emphasized that initial coin offerings (ICOs) will be met with tighter regulations, while true cryptocurrencies will be embraced with smart policies.
Hard for ICOs
At the senate hearing (as previously reported by Cointelegraph) Jay Clayton noted that every ICO token the SEC has seen so far is considered a security and explained that if a crypto-asset issued by a company increases in value over time depending on the performance of the company, it is considered a security:
"You can call it a coin, but if it functions like a security, it’s a security.”
Although most ICOs do not offer equity or a stake in their projects in order to exempt themselves from SEC regulations, if the SEC considers tokens that increase in value based on the performance of Blockchain projects featuring the tokens, then virtually every single ICO can be considered as a security.
Clayton also sent a warning to ICO projects and token issuers in the market, stating that the SEC intends to impose stricter restrictions on the ICO ecosystem:
“A note for professionals in these markets: those that engage in semantic gymnastics … are squarely within the crosshairs of our enforcement division.”
Jay Clayton, chairman of the US Securities and Exchange Commission
However, Clayton make a distinction between ICO tokens and major cryptocurrencies such as Bitcoin and Ethereum. He labelled ICO tokens securities, while classifying the others as "true cryptocurrencies,” promising smart and practical regulations for exchanges and investors dealing with these cryptocurrencies.
Clayton referred to true cryptocurrencies as public Blockchain networks with native cryptocurrencies either mined or produced by the public. If a certain company has control over the monetary supply of its crypto-asset distributed to its users and the value of the token is based on the performance of the company, Clayton reiterated that the token is a security and falls under the regulations imposed by the SEC.
Both CFTC chairman J. Christopher Giancarlo and senator Mark Warner said that cryptocurrencies like Bitcoin and Ethereum cannot be separated from their respective Blockchain networks. As such, Blockchain does not exist without native cryptocurrencies.
“I don't think you can separate cryptocurrencies from Blockchain,” said senator Warner, as chairman Giancarlo echoed a similar sentiment. "It’s important to remember that if there was no Bitcoin, there would be no Blockchain or distributed ledger technology,” chairman Giancarlo added - a phrase that has already become famous.
What can the market expect?
The ICO space and projects within that industry are likely to face difficulties in conducting token crowdsales due to regulatory conflict with the SEC. Blockchain projects may still be able to conduct ICOs outside of the US, but there remains the possibility that the SEC may target a project with investors based in the US.
For many months, the majority of ICOs worldwide have excluded US-based investors from token crowdsales due to the strict SEC regulatory regime. In fact, many ICOs have already transitioned to private token sales, distributing tokens to buyers on a whitelist. This trend is likely to continue throughout the long-term, and eventually, public token sales will no longer be offered.
The outlook appears different from the global cryptocurrency market. Cryptocurrency exchanges and investors can expect more friendly regulations to be rolled out in the future. As hinted by chairman Giancarlo, a national licensing program and unified regulatory frameworks could be implemented in the short-term, similar to the system employed by Japan.
“We owe it this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one.”
J. Christopher Giancarlo, chairman of the US Commodities and Futures Trading Commission
Currently, cryptocurrency regulation differs from state to state and for both small and large-scale cryptocurrency companies. This variance in regulation often leads to an increase in legal costs which can be up to millions of dollars.