ICO vs SEC: round 1, fight!

enxo rizzo
Jul 30, 2017 · 5 min read

TL;DR

SEC(securities and exchange commission, from U.S.) issued a ruling that some crypto tokens could be considered securities and have to be regulated by, well…, by SEC themselves. It will have some impact on the markets, but not on the industry as a whole. Mostly, because investors themselves don’t (yet) grasp what they’re throwing money at.

The Contenders

SEC has just ruled that some digital tokens (like ETH, or ICN, or many others) are securities, just like an ETF or stock shares, so they must follow the law and be traded only in licensed exchanges, such as Nasdaq. Companies cannot just issue a token, and start selling it on blockchain, they must be audited and accepted, just like a company would do to be listed in a traditional stock exchange. Investors cannot just grab some bitcoin or eth, and buy the token if they think it’s a good investment, they must wait for the token to be listed in one of the approved exchanges.

ICOs are issued directly on the blockchain. Mostly nowadays on the Ethereum chain (the ERC-20 tokens), some create their own blockchain, like IOTA. Usually the process is simple enough, although technical, it boils down to “i have an account number, send the moniez(btc, eth, usd, eur, etc), to it and get some number of my tokens back”. This is automatic, handled by the “smart contracts”(it’s a funny name, they’re so dumb), no brokers/middle men, the blockchain just handles it, and you the investor(and anybody else) can see the result in the ledger, because it’s public, not in some company/exchange private server.

The Field

A blockchain (say, btc or eth as example) is located, lives, functions, whatever analogy you want, on the internet. Meaning, anywhere, everywhere there’s a computer running that software. Then they all talk together, and by consensus, accept new transactions/operations for that network(blockchain). So, anybody with a net connected device can interact with any of the devices on the Bitcoin chain, for example. Which exact computer/node, or where it is located becomes irrelevant, because they all must agree, but you/your device does not talk to all the network, just a random node, and then the message spreads.

But on the other hand, if anyone wants to buy/sell any token (just like a stock or gold or oil) they usually head to an exchange. Anyone can do it direct, from one crypto wallet to another, but it’s just too painful. Head over to Coinbase, Kraken or whatever exchange and trade the coin/token. Attention, there is nothing in the blockchain tech that stops you from direct buy/sell, it’s just more convenient to do it on the exchange. Unlike stocks, which have to be traded in some exchange.

In traditional finance, to buy stock means some guy(a bank, a broker) has a licence to keep shares in your name. But, in the finer print and minor details, it’s not you that owns them. Yeah, go ask the aforementioned guy, they twist and squirm, and finally admit that your shares are registered in the “that guy” name, and only the bank/broker internal system holds a record that you bought them. If the bank/broker goes belly up, good luck getting your stock. For YOU to get stock/ETF/whatever in your actual name, YOU need to go to a stock exchange, register with them, and either show you have structure(accounts, software, an so on) to hold shares, or request to print a paper and take that number of shares from the exchange system. And then they’re truly yours.

With an ICO issued token, you have your crypto wallet. You buy the token (at ICO, or an exchange, whatever). You transfer them to your wallet. You have the password. Done, they’re yours. Nobody else can touch them, as long as the blockchain is working.

See the difference in the size of the paragraphs? that’s what blockchain tech is doing to the whole middleman/financial/commission based industry.

The Rules

So, even though SEC cannot stop any individual(wallet) from acquiring a token, they can enforce the rules on exchanges and/or token issuers operating in the US. Any company that issues an ICO, has from now on to be subjected to SEC, just like an ordinary IPO, or risk being shut off. Any US exchange that wants to include some tokenX in their list, must get it sanctioned by SEC.
SEC will make sure that the token is a viable project, with responsible people, following some set of rules, not just a scheme to “pump dis shit to da moon, lambos!”

They should verify that some rules are followed, that some people are accountable in case the project goes bust, and whatever else they require to make that asset “safe”(bernie madoff just popped to mind, but i diverge…).

But, and here is the catch, they can only do so inside US territory. The SEC does not have legal jurisdiction in the rest of the world. So, if some Hong Kong based company sells the token on a ICO, and some exchange in Bulgaria is selling it, there’s not much the SEC can do. The ICO sellers can do two things: either comply by SEC rules to be traded in US, or just ignore US and don’t accept US buyers. But then again, if your wallet is in the blockchain, and you transfer direct to the ICO wallet, how can they know?

Picture it like this: an hotel (the ICO) located in Bali, or Fortaleza, receives a guest that turns out to be a felon in the US, so authorities go to the hotel and say, the hotel is responsible for harbouring the criminal, and will be prosecuted. Now, the hotel goes, 1- we got a costumer, we don’t have to check if they’re wanted for any reason, 2- it’s your business to deal with US criminals, not the hotel’s, and 3- you don’t get to order us, because this is Bali(or Fortaleza), you have to jurisdiction here.

Basically, we’re not in Kansas anymore.

The Fight

So, in one corner, SEC tries to oversee and regulate ICOs, but can only do so to US based entities, be the token issuers, or the exchanges that trade them. In the other corner, there’s all the companies, some good, some bad, and all the exchanges in the rest of the world. The US is the 800 pound gorilla in the room, with all the investor clout. But there’s one million ants running around, and the room is big, tons of money piling all over.

The SEC ruling brought some cold water into a red hot, boiling bubble. Serious projects/companies will not want to ignore the pockets of US investors, but will only go so far to comply, until it’s less burdensome to just let go of US investment money. Unless it’s a specific US targeted project, but there are not many of those around.

The Score

In the end, it will be a gorilla vs the ants fight. SEC can smash and pound a lot of ICOs, but a lot more keep popping up, and so many are so outside it’s reach, they will not even notice there’s a gorilla going around. Investors from US who are really interested will not be stopped, specially when the entry barrier is so low. ICOs from companies in somewhere-not-states will welcome all other investors, and US based buyers will not want to miss out, just because daddy-SEC knows best what’s good for them.

The gorilla will finally understand that smashing a few ants does not stop the whole colony from growing. And it will throw the towel exhausted.

And everybody else will just switch channel, because the fight was rigged all along.

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