he SEC shook the blockchain community last week when it issued a report ruling that the $50 million worth of tokens that were stolen last summer as part of a hack on the DAO were securities and should’ve been registered with the SEC. The DAO was a decentralized platform for investing in Ethereum-focused startups that was essentially an early version of the now popular Initial Coin Offerings. The report will likely slow the pace of new ICOs, as fledging company’s comprising a couple of ambitious engineers figure out how, exactly, to go about registering their projects.
But CoinDesk analyst Noelle Acheson, in a report for the site’s premium subscribers, argued that the ruling’s benefits outweigh the short-term inconvenience that these startups will likely experience as they rush to recruit compliance specialists to vet their offerings and communicate with the SEC.
By declaring that ICOs should be regulated like securities, the SEC is admitting that they are, indeed, securities. This is a landmark ruling. Since the CFTC first declared bitcoin to be a commodity in 2015, regulators have provided precious few updates to help move the digital currency further down the path of legitimacy. Earlier this summer, the Delaware legislature passed a law officially legalizing the use of blockchain technology in the trading of stocks. Later, the agency issued a registration order to startup called LedgerX, granting it status as an official CFTC Swap Execution Facility, legalizing bitcoin options trading the process.
Capital raising through blockchain requires compliance with federal securities laws https://t.co/IjOxjoVdfK
— SEC Enforcement (@SEC_Enforcement) July 25, 2017
As Acheson writes, “the short-term impact on digital token issuance, assuming their assuming one, will probably instigate some sharp moves…"
“But there's something else going on here that will end up boosting blockchain development and injecting a welcome dose of innovation into securities issuance and regulation.
It's not so much that the SEC has officially determined that blockchain assets can be considered securities and therefore have to comply with the law. It's that blockchain assets can be considered securities at all.”
Acheson’s analysis echoes our commentary featured in a report on the initial ruling. As we said, while the SEC's intention to regulate ICOs will probably have an initial chilling effect on the market. Not only is it a blessing in disguise as it will not only validate the blockchain capital-raising mechanism, allowing the entrance of major banks to use it as a fintech alternative to IPOs, but it will also help weed the proliferation of fraudulent schemes that presently are thriving in the grey area of legitimacy.
By choosing the regulate ICOs, the SEC is opening the door for the coins to eventually be used as collateral for capital markets transactions, a crucial step toward the crypto community’s goal of supplanting fiat currencies. Finally, we posited that the Federal government’s oversight will force companies to tighten cybersecurity controls after hackers tallied $40 million in ill-gotten gains during a series of attacks on ICOs this year.
“And if blockchain assets can be considered securities, securities can be transformed into blockchain assets.
This takes the Delaware achievement (changing the law to allow registered businesses to issue securities on a blockchain) and magnifies it, sending a signal to all states that a federal regulator is willing to broaden its definition of acceptable transmission methods.”
The SEC's decision is an important step in a competition to determine which global regulators are leading the process of legitimizing blockchain-based asset and incorporating them into the existing global financial framework is intensifying. Last month, regulators in Switzerland granted a local bank permission to trade cryptocurrencies and incorporate them into the portfolios of its private banking market. As we reported at the time, the decision placed Switzerland at the forefront of the rapidly universe of blockchain finance, and will likely encourage other global regulators, including the SEC and the Fed, to follow suit.
Acheson posited that the agency’s most recent bitcoin-elated ruling will help repair the damage inflicted on the SEC’s credibility, at least in the eyes of the blockchain community, after it rejected NYSE Arca’s request for a rule change that would’ve used opened the door for the first bitcoin-focused ETF.
“Entrepreneurs and developers will have more confidence in their project's outlook knowing that it is compliant in multiple jurisdictions, with access to a broader pool of investors.
In addition, it sends a message to other jurisdictions that blockchain-based assets are not going away. Securities regulators around the world have been intensifying their efforts to catch up with the innovations while fulfilling their mandate of protecting investors. Guidance from the SEC is likely to help.”
Coincidentally, the SEC ruling has arrived a crucial time for bitcoin and the broader crypto universe, as a group of developers prepares to release an alternative to SegWit, potentially triggering a fork in the bitcoin blockchain that could render some coins worthless. Despite this, bitcoin is higher (up 5%) and the rest of the major virtual currencies lower (down 4%).
Support for Segwit has climbed above the threshold for adoption, which presently stands at 80% of the network’s hashing rate, according to Blockchain.info. This is an incredibly bullish indicator: As we’ve noted, the post-segwit rally could swiftly carry the digital currency above $3,000 a coin to a fresh all-time high.