A new trend in digital assets regulation
The U.S. Securities and Exchange Commission (SEC) gave serious consideration to the regulation of the cryptocurrency investment market this year. As a result, several ICO projects were fined, and Elon Musk had to leave the post of the head of the Tesla Board of Directors.
Aleksandr Sinitsa, Junior Associate of the Blockchain Practice of Juscutum Law Firm, explains us the SEC plans as for achievement of compliance with the requirements of the securities legislation from the players of the digital asset market.
This November, the cryptoindustry witnessed active SEC actions in relation to digital asset market players. Sanctions against CarrierEQ Inc. and Paragon Coin Inc. were the most resonant ones (Airfox and Paragon ICO projects respectively), as well as the decentralized exchange (DEX) EtherDelata and its founders.
After such high-profile cases, the community had too many questions SEC could not ignore. As a result, on November 16, the U.S. Securities and Exchange Commission issued a statement in which it had finally dotted the i’s. The Commission had formulated its position on approaches to regulating certain activities related to digital assets issue, trade and investment.
In particular, the SEC statement addresses the following issues:
- requirements for companies engaged in the initial placement of digital assets that fall under the category of securities (including issued within the ICO);
— requirements for investment funds operating with digital assets that are classified as securities;
— requirements to the platforms on which virtual assets are traded, which fall under the category of securities.
Conclusions that should be made by cryptobusiness in connection with this SEC position: 2 key points
- The SEC has demonstrated that it is ready to compromise and grant a second chance to many ICO projects, which tokens were issued in violation of procedures provided by U.S. laws.
On November 16, the SEC also published its press release, in which it reported on the investigation conducted in relation to Airfox and Paagon ICO projects, as well as on the agreement reached with the projects. In addition, SEC regulations, adopted in relation to these ICO, were adopted. There you may find detailed rationale of the Commission concerning violation of Federal laws requirements on registration of securities issued by the projects. In addition, there is an opportunity to learn about the responsibilities the “violators” have assumed in order to fulfill transaction with the SEC.
It is important to understand that Airfox and Paagon were not the first ICOs that attracted the attention of the Commission, as securities issuers without proper registration of such issue. Yet on June 25, 2017, the SEC released its report in respect of DAO tokens that explained that tokens produced by ICO may present an investment contract by their nature. Whereas an investment contract according to Securities Act of 1933 is security with all that it implies. One of the key indicators that allow to determine a transaction for tokens purchase in ICO as an investment contract is the expectations of buyers to gain profit. In Airfox and Paagon’s case, the SEC has found that token buyers had “reasonable expectations” of gaining a profit, which were warmed up by the projects during the ICO and marketing campaigns.
The main difference of Airfox and Paagon from previous “victims” of securities regulation in the United States was that the SEC and ICO projects were able to reach an agreement, on which basis the Commission would only impose a penalty of $250,000 and undertake to refrain from imposing further sanctions. At the same time, Airfox and Paagon undertake within 90 days to start the procedure of registration of their tokens issue as securities issue in accordance with U.S. law. Moreover, projects have to notify all their investors about the possibility of returning the funds invested in the ICO (if investors express such an intention).
According to Steven Peikin, co-Director of the SEC division for control over implementation of legislation, an example of such an agreement provides a possible model of behavior for companies that have already issued their tokens through ICO conduct and seek to find the path to compliance with Federal securities laws.
Through Airfox and Paagon example SEC shows another ICO, which conducted the unregistered securities issue, a possible path to the legalization of their projects. In other words, currently, many ICOs have a chance to get off SEC easy, paying fines, returning funds to aggrieved investors, and passing the procedure of registration of their tokens issue. More likely for a few months there will be some respite in SEC’s hunt for ICO violators. During this period, the SEC will allow all projects to follow the AirFox and Paragon’s path. After some rest, the SEC will resume hunting season for ICO projects conducted in violation of U.S. securities legislation, and most likely violators will not be able to get off with fines only.
- The SEC has finally closed the issue of the applicability of legal requirements to the registration of exchanges where securities are traded in relation to DEX-platforms.
Through the EtherDelta case Commission showed: any platform that falls under the definition of “exchange” and trades securities shall be registered as a national securities exchange (or apply to the SEC for exemption from registration). For the Commission it does not matter whether the platform is centralized and managed, or decentralized, and operating independently of its creators, based on built-in algorithms. The SEC focuses on the fact that the platform, in order to determine whether such a platform is an exchange within the meaning of U.S. laws, is carried out regardless of how the platform is identified and what technologies or algorithms it applies. The most important thing is that the platform, which operates in accordance with its algorithms or smart contracts, has provided its users with opportunities to trade securities, combining buyers and sellers orders. Given the fact that the platform was trading a variety of token types, including tokens that had specific features of securities, the SEC’s accusations against DEX seem quite justified. Thus, it was rather logical to recognize EtherDelta as “exchange”.
The cryptoindustry does not know yet whether other ICOs will follow the path of Airfox and Paagon and whether we will soon watch DEXs lining up to register their platforms. It should be noted that the SEC’s intention to define clear rules of the game for a variety of disparate digital asset market players is a positive aspect aimed at eliminating the regulatory vacuum and uncertainty in the cryptocurrency sphere.
Aleksandr Sinitsa, a lawyer of Blockchain Practice in Juscutum Law Firm.
