How market is evolving in terms of crypto regulation?

When it comes to regulation, what exactly is a cryptocurrency?

Is it a currency? Is it more like an equity? And if it’s an equity, does that mean it needs to be regulated like any other collateral?

How regulators like the SEC identify and define cryptocurrencies is important because it affects both the value of cryptocurrencies, and how likely it is that blockchain technology will flourish in a specific jurisdiction.

For example, if a countrys regulatory body determines that cryptocurrencies should be banned, then this will drag down costs (depending on how big the country) and blockchain technology businesses will avoid setting up shop or investing there they wont feel welcome.

The SEC has been notably silent on the topic of cryptocurrencies. Other regulatory bodies and authorities, primarily in Asia, are extremely proactive in outlining how they will treat and regulate bitcoin and cryptocurrencies within an asset class.

In May, I advised you that the SEC would finally become this market. Especially as the monetary stakes increase.

Now, it looks like the SEC is on the ball.

Investigating the DAO

Earlier this week, the SEC issued the results of an investigative report into the details surrounding a cryptocurrency initial coin offering (ICO) called the DAO in the first half of 2016.

An ICO is when a new cryptocurrency token is offered for sale to the general public, similar to an initial public offering (IPO) in the stock exchange.

The DAO intended to be a fully decentralised cryptocurrency venture capital finance. It would increase money (in the form of a cryptocurrency called ether), issuing DAO tokens in return. It would then allocate those elevated ether funds to different business ventures by way of voting among the DAO token holders.

The DAO raised US$150 million worth of ether from some 11,000 investors. But then tragedy struck. Despite assertions that the DAOs code had been analysed by one of the worlds leading security audit companies and that no stone was left unturned during those five complete days of safety analysis, DAO was murdered. US$50 million of ether was stolen.

The SECs investigative report wasnt about trying to identify the culprit behind the attack. Instead, it was focused on whether or not DAO tokens constituted a safety (that is, a stock) and should therefore be regulated under existing securities laws.

Are cryptocurrencies securities?

The simple answer is maybe. The fact is, every cryptocurrency token has its own characteristics.

As the SEC report set it;

U.S. federal securities law might apply to different activities, including distributed ledger technology, depending on the specific facts and circumstances, without regard to the form of the organization or technology used to effectuate a particular [cryptocurrency] sale or offer.

In other words, it just depends. But on what?

To answer that, we turn to the Howey Test, which was created by the Supreme Court as a way of ascertaining whether certain transactions qualify as investment contracts.

[The test identifies a precedent from a case the SEC levied against Florida companies W. J. Howey Co. and Howey-in-the-Hills Service, Inc. that sought to determine whether or not a specific land-related deal comprised an investment contract under the Securities Act of 1933.]

If particular transactions meet the standards, then they’re deemed securities and subject to a raft of regulatory requirements.