In 2017 a small number of cryptocurrency Initial Coin Offerings (ICOs) raised billions of dollars around the globe. This happened as Bitcoin, the most well-known “brand” of cryptocurrency, soared in price and then declined.
I’m a veteran of the dot com boom and bust, and as they say, history may not repeat itself but it rhymes. I was skeptical of ICOs.
Sure enough, US securities regulators at the Securities and Exchange Commission (SEC) took notice of the speculative frenzy around cryptocurrencies. On March 7, 2018 they made an announcement that left no doubt of their viewpoint.
Their announcement was titled “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets” and opens as follows:
Online trading platforms have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings (“ICOs”). The platforms often claim to give investors the ability to quickly buy and sell digital assets. Many of these platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data.
A number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws. If a platform offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration. The federal regulatory framework governing registered national securities exchanges and exempt markets is designed to protect investors and prevent against fraudulent and manipulative trading practices.
Here’s a translation.
The US has a very specific definition of a “security” which includes corporate stocks and bonds, but also other financial things such as loans to companies and commodities contracts. And the US (and most other countries) has very specific and extensive rules regulating securities.
The SEC is stating very clearly that “a number” of these “digital assets,” meaning cryptocurrencies such as Bitcoin and more than a thousand other variations, are securities because they “meet the definition of a security under the federal securities laws.”
And therefore the SEC’s rules apply to ICOs.
Which means that the cryptocurrency exchanges must either register as an exchange, or figure out that they are exempt.
It’s highly likely that many, if not most, cryptocurrency companies that raised money in an ICO don’t want to register as a securities exchange. That means you have to follow the same rules as the New York Stock Exchange and NASDAQ. Lawyers’ fees will kill all profit.
The SEC does allow for “Alternative Trading Systems,” but these are only for trading among institutional investors (mutual funds, pensions, university endowments) and wealthy individuals.
Not average Americans who have been trading Bitcoins and other cryptocurrencies.
If cryptocurrency exchanges want to become an Alternative Trading System, the SEC has helpfully linked to its 108-page PDF of regulations for exchanges.
The ICO Boom Is Over
There is no reason to think that Initial Coin Offerings in the US will continue with anywhere near the volume of 2017. And many of those companies who raised ICO funding could end up as disastrous failures by the end of 2019 when their cash runs out, and SEC enforcement makes running a real business impossible.