April 4, 2019, | AtoZ Markets - The U.S. Securities and Exchange Commission (SEC) has recently released new guidelines on cryptocurrency regulation.
Since the introduction of the digital assets, the fintech representatives have been seeking more clarity from the U.S. Securities and Exchange Commission regarding News the status of cryptos. Blockchain enthusiasts expected from the local authority to clarify whether cryptocurrencies fall under existing securities' legislation or not. Today, two members of the US financial agency- Bill Hinman and Valerie Szczepanik published new recommendations on regulating digital assets.
Crypto regulation guidelines demand more improvements
The new guideline supposed to help crypto companies decide whether their digital assets are subject to applicable securities' laws. Although the official US SEC decision has not been determined, the guidelines authors hope that the new guide will help market participants clarify the legitimacy of investing in digital assets. However, In the accompanying document, the authors indicated that the guidelines are not complete and should not be used as legal advice.
SEC classifies cryptos as “Investment Contracts”
The new document was entitled “Structure of Digital Asset Analysis under an“ Investment Contract ”. It attempts to determine the status of the cryptocurrency and whether it should be considered by the Securities and Exchange Commission as an investment contract and, therefore, subject to federal securities law. Hinman and Schepanik emphasized that it is necessary to consult FinHub SEC more formal, modern rules regarding crypto space.
Application of Howey to digital assets
As the guidelines focus mainly on the classification of digital assets as a type of investment contract, the authors of the new SEC crypto regulation guidelines emphasize that the long-established Howey test should be applied to the crypto and ICO in particular. Most of the content of the document is devoted to the topic of determining how “the efforts of others” in a cryptocurrency project can increase the value of the initial investment. The guideline states that none of the listed criteria is sufficient for the purchase of a digital asset to be truly considered an investment contract. However, having several characteristics means that it is much more likely. Some of the examples include:
- Where the digital asset was still under development at the time of sale.
- Where an active participant in a project is able to determine where the funds received from the sale of a digital asset will be spent.
- Where the active member controls the total delivery of the asset by creating or writing tokens.
The “Investment of Money” easily applies to crypto offers
According to the lawmakers, investments in the general corporate aspect of the Howey test are usually satisfied with cryptocurrency offers. However, “a reasonable expectation of the profit from the efforts of others” is much more difficult to define.
The clause of “reasonable profit expectation” of the Howey test seems applicable to many crypto projects, in particular, to indicate: “The opportunity may arise from an increase in the value of a digital asset that is, at least in part, related to exploitation, promotion, improvement or other positive changes online, especially if there is a secondary trading market that allows holders to use digital assets to resell their digital assets and make a profit. ”
Certain crypto companies might violate current US law
Despite the joy of the upcoming legislation clarity in the crypto space, some crypto experts have concerns on the new guidelines. The new SEC crypto regulations guideline states, that “the federal securities laws require all offers and sales of securities, including those involving a digital asset, to either be registered under its provisions or to qualify for an exemption from registration”
According to them, this term might indicate that a number of crypto projects can violate US securities laws, since they were not registered by the commission during an ICO, and the nature of asset allocation means that it can be classified according to legislation as an investment agreement. However, bitcoin, which is launched and developed in a decentralized manner, might be an exception from the current securities legislation.
SEC and digital assets relation stays unclear
ICO became extremely popular in 2017 and had collected more than 6 billion dollars. However, later, prices for most cryptocurrencies fell, and many companies and projects related to ICO had gone bankrupt, reduced production or the number of employees. Similar consequences, as well as a large number of ICO fraudsters, increased control by the regulatory authorities. As a result, the SEC strengthened control over crypto space. In spite of this, however, the latest SEC guidelines for ICOs have become more balanced. Despite all controversy that has surrounded digital assets it seems that the US regulator is starting to accept ICOs more.
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