The problem with the SEC’s ruling on The DAO and Digital Assets
Not all ERC20 tokens are created equal.
In case you haven’t read, the SEC just released a statement on The DAO ICO. https://www.sec.gov/news/press-release/2017-131
In this statement they begin by saying:
The Securities and Exchange Commission issued an investigative report today cautioning market participants that offers and sales of digital assets by “virtual” organizations are subject to the requirements of the federal securities laws. Such offers and sales, conducted by organizations using distributed ledger or blockchain technology, have been referred to, among other things, as “Initial Coin Offerings” or “Token Sales.” Whether a particular investment transaction involves the offer or sale of a security — regardless of the terminology or technology used — will depend on the facts and circumstances, including the economic realities of the transaction.
While I understand the investment point of view for ICO’s being an investment, I have to question whether they believe all ERC20 tokens are investment opportunities.
The Ethereum Project hails itself as a “supercomputer”. One of these features is the ability to build decentralized applications. While most of the press is focused on the crazy profitability (and in my opinion, insanity) of the Initial Coin Offering, they never cover what the purpose of a token is. That’s the problem, ERC20 tokens can have a multitude of purposes. Several ICO’s are using them as currencies for their dApps, but that isn’t their only purpose.
Ether, the fuel for the Ethereum network, has one primary purpose…to process transactions. While you can send large sums to others and for the purpose of buying tokens, it’s also burned as “gas” in every transaction. Not all of these trades are for an investment. There’s a growing trend of collectible assets on the network (something I’m excited to talk about soon). These also come in the form of ERC20 tokens and serve no purpose other than to show you own them (like baseball cards). There are also gaming focused dApps that utilize ERC20 tokens in-game for items such as swords, land, and more.
In the SEC’s ruling they write as a defense that the DAO was an investment opportunity:
Under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, asecurity includes “an investment contract.” See 15 U.S.C. §§ 77b-77c. An investment contractis an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
They conclude the ruling with: “ Whether or not a particular transaction involves the offer and sale of a security — regardless of the terminology used — will depend on the facts and circumstances”. That’s a pretty open-ended statement and something that we’ll have to educate on moving forward.
I’m left hopeful by Jay Clayton’s statement that the SEC will consider the other practical applications of ERC20 tokens outside of just going on sale for a ‘digital entity’.
“The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us,” said SEC Chairman Jay Clayton. “We seek to foster innovative and beneficial ways to raise capital, while ensuring — first and foremost — that investors and our markets are protected.”
I encourage you to reach out to the SEC with your comments and expertise. As of now they’ve chosen not to press charges. In order to see mass buy-in to blockchain tech and ensure that the developers, users, and hobbyists are protected — there may need to be laws and regulations. However, if we remain quiet, these very laws meant to protect could cripple blockchain innovation forever.