It seems like everyone these days is talking about SEC regulation of the Initial Coin Offering market, with many ICOs going as far as to ban U.S. financiers from their offering. Even as my company, CoinJob, sets up to launch our ICO, we are constantly asked how we are thinking about the U.S. regulatory environment.
In my previous role, I worked for the White House, where I was responsible for helping staff the SEC, CFTC, and other regulatory bodies. I have talked to these agencies at-length about their regulatory oversight in this market and have come away with two key takeaways:
· The SEC does not have the regulatory authority to impose regulations on cryptocurrencies. This responsibility falls to the CFTC, which is responsible for forex transactions.
· The CFTC only cares about the regulation of currency exchanges such as Coinbase and the derivatives market that is arising from the currencies.
Point 1: The SEC does not have the regulatory authority to regulate the crypto-currency market.
In my conversations with S.E.C. officials, the discussion turned time and time again to what their regulatory domain is and whether crypto-currencies fall into it. According to their charter, it is the responsibility of the Commission:
· To interpret and enforce federal securities laws;
· To issue new rules and amend existing rules;
· To oversee the inspection of securities firms, brokers, investment advisers, and ratings agencies;
· To oversee private regulatory organizations in the securities, accounting, and auditing fields; and
· To coordinate U.S. securities regulation with federal, state, and foreign authorities.
Only bullet number two is applicable to crypto-currencies in any way. However, they only have the authority to issue new rules and amend exists rules in the securities industry. This brings us back to a main question: Are crypto-currencies securities and therefore, do ICOs constitute an issuing or offering of securities?
By the SEC’s own admission, in my conversations with SEC employees, they are not. Many in the crypto-currency community have pointed to “the Howey test” as basis for the argument that ICOs are indeed securities offerings. The Howey test stems from a 1946 Supreme court case that determined a transaction is an investment contract if the following four things are true:
· It is an investment of money
· There is an expectation of profits from the investment
· The investment of money is in a common enterprise
· Any profit comes from the efforts of a promoter or third party
Newly created crypto-currencies via ICO fail on two of the four measures of the Howey test.
First, ICOs are not looking for investments in USD or any other type of traditional currency. On this point, logic dictates you can’t have it both ways: If you argue Ethereum, Bitcoin and the other cryptocurrencies used to finance ICOs are money in another form, then the new cryptocurrency being issued must also be money (i.e. a currency) and therefore is not a security. On the other hand, if you argue they are not money, then it clearly fails bullet one of the test.
Point three fails by this same logic: if there is no investment of money then there cant be an investment of money in a common enterprise.
If cryptocurrencies, therefore, are not securities, the SEC cannot have regulatory authority over them.
Point 2: If cryptocurrencies are treated like currency, it is the CFTC who can regulate. However, they are only concerned with derivatives markets on exchanges.
For those who don’t know, the CFTC is the Commodities Futures Trading Commission, which regulates commodities, forex, and other futures and options markets.
On September 17th, 2015, the CFTC issued an order against Coinip. Inc. which allows Bitcoin derivatives trading on its platform. In this order, the CFTC claimed that Coinip was offering commodity options and therefore in violation of the Commodity Exchange Act.
On this date, the CFTC stated, “In the Order, the CFTC for the first time finds that Bitcoin and other virtual currencies are properly defined as commodities.”
This puts the U.S. government in a tricky position if the SEC were to suddenly claim cryptocurrencies as securities, as it would negate the regulatory authority already claimed by the CFTC.
Even as recently as July 8th, 2017, the CFTC further asserted their regulatory authority over the market by allowing for Bitcoin options on properly registered exchanges.
In my conversations with the General Counsel’s office of the CFTC, I asked about the regulatory authority of ICOs and they assured me that the market was unregulated and that they were only concerned with regulation of fair options and derivatives markets of cryptocurrencies.
As it relates to CoinJob, I am not worried in the least about SEC regulations, as there are none and the SEC does not have the authority to regulate this market.
We are based in the U.S. and if U.S. citizens want to finance our ICO, bring it on. I invite other ICOs to take the same approach and for everyone involved to do their diligence to separate truth from fiction.