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SEC ICO guide impact on crypto exchanges

Maya Mandzikasvili | Feb. 18, 2019
SEC ICO guide impact on crypto exchanges

February 18, 2019, | AtoZ Markets - In its recent report, Atozmarkets quoted Barry Silbert, CEO, and founder of Digital Currency Group and Grayscale Investments who stated that most of the digital tokens will have no value in the long run. Now, after the recent Securities and Exchange Commission (SEC) tweet about their newly released ICO guide, cryptocurrency exchanges future does not seem so bright either. In addition, the new document might cause at least one possible violation of the First Amendment by the SEC.

A detailed overview of the U.S. SEC ICO report

In their Twitter account, the U.S. financial authority posted a link to their recently published recommendations for those who run and invest in ICOs. Many experts nevertheless believe that a year after the cryptocurrency hype, these recommendations are seem be too brief and appeared too late.

In their guide, SEC defines security as tokens or offerings “that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others.”

Such definition caused expected reactions from the certain crypto executives, which have started to identify their businesses as a part of a “protocol” rather than a company in the last few months. For instance, in his recent interview, Justin Sun, a CEO and co-founder of Tron outlined that his project “is also more like a protocol rather than a company.” The executive of one of the largest blockchain based operating systems in the world added that it is “also introduced like a brand new concept of the protocol rather than a company institution or profit or entity.”

Sun, who is considered as a man with a reputation of successful blockchain product promoter, made a name for himself as the pragmatic founder who used to make sometimes outrageous comments about future profits of his project. At the end of 2018, when Vitalik Buterin, one of the founders of Ethereum, honestly admitted that the ETH bull-run in 2017 was based on a little more than on a promotion, Sun took his opportunity to accelerate hype around his own project by saying :

“Vitalik: next wave of crypto is not going to be built on hype.@VitalikButerin admits that #ETH lead the 2017 bull run built on hype. #TRON will lead next bull run built on massive adoption dapps and @BitTorrent.”

According to the experts, such provocative statements may attract more attention from SEC and focus on the definition of security can bring negative consequences. However, crypto enthusiasts believe that this also suggests that the investment in Tron will pay off thanks to the efforts of BitTorrent.

Unintentional violation of the law of securities by the exchanges might be real

According to the latest SEC ICO report, a cryptocurrency exchange could violate the securities laws in case if it facilitates the trade of security coins and tokens without concern.

The ICO guide of the U.S. financial commision declares, that if a platform operating as an “exchange” offers to trade digital assets which defined as securities 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.” Due to the new rules, certain exchanges offering altcoin trading start operating in a more favorable legal environment for cryptos, like Malta or South America.

However, the financial experts suggest that relocation might not be enough to save some of the exchange platforms from SEC attention. As an example, they mention the recent shutdown of Marshall Islands cryptocurrency exchange 1Broker.

Decentralized cryptocurrency exchanges might violate SEC guidelines too

According to SEC, “the activity that actually takes place between buyers and sellers, and not the type of technology or terminology used by the entity operating or promoting the system, determines whether the system functions as a market and meets the exchange criteria according to rule 3b-16 (and ) " This statement means that it doesn’t matter whether exchange is a centralized, proprietary, or a decentralized or autonomous piece of code.

What is more crucial according to SEC is that on that platform happens unregistered trading.

After this SEC innovation of the crypto exchange regulation, the charges against EtherDelta and its founder, Zachary Coburn, last year, do not come as surprise.  

At that time, the SEC described Coburn's crime as “providing a market for integrating buyers and sellers of securities with digital assets by sharing a website that displays orders, in other words, a book of orders and a smart contract running on the Ethereum blockchain.”

The nonprofit digital civil rights group, the Electronic Frontier Foundation (EFF), in its turn, called the prosecution of people who upload open source projects to Github “unconstitutional” as it is a violation of the rights of the First Amendment. EEF added that the “free speech protections enshrined in the First Amendment and upheld through court cases across decades include the rights of individuals to publish their ideas without preemptively obtaining a license. And code itself is speech.”

The civil rights protectors sent a nine-page letter to the U.S. financial regulator last week, emphasizing the importance of keeping human constitutional rights in mind when wielding their regulatory whip.

What new regulations await digital assets in 2019?

At the moment it is difficult to predict what will happen next. The SEC apparently signals its intention to renew its focus on cryptocurrency in 2019. On the other hand, not all branches of the US legal system agree with the new definitions of the commission. In 2018, nineteen different cryptocurrency projects hit by the SEC.

The number of such cases in the previous five years was only twelve. At the same time, despite the fact that the ICO status in the financial market has changed a lot over the past year, the SEC’s view of this kind of digital assets remains the same.

In 2017, SEC Chairman Jay Clayton said that a token that represents a participation interest in a book-of-the-month club “may not implicate” their securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders.”

Since that statement, lots has changed and now the following analogy proved to be very accurate, despite being made before the ICO hype. According to the new ICO definition, “many token offerings appear to have gone beyond the previous construct” and became more analogous to “ interests in a yet-to-be-built publishing house with the authors, books and distribution networks all still to come.”

Think we missed something? Let us know in the comments section below.

Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ Markets.com, nor should they be attributed to AtoZMarkets.