How the SEC is Impacting Crypto Regulation: An Overview

There are a lot of moving pieces. Catch up on the latest with SEC crypto regulation and check back, we’ll be updating when new rulings are made.

On February 6, 2018, Jay Clayton, Chairman of the US Securities and Exchange Commission (SEC) and Christopher Giancarlo, Chairman of the Commodity Futures Trading Commission (CFTC) testified in front of the Senate Banking, Housing and Urban Affairs Committee to address their agencies’ regulatory frameworking on virtual currencies. Among other things, they discussed:

  • The agencies’ oversight and current regulatory frameworks
  • Their thoughts on how to coordinate efforts to monitor and regulate virtual currencies
  • How to better educate the public and investors on risks associated with virtual currencies

They both seem to have a positive attitude towards the underlying blockchain technology powering virtual currencies, but were more cautious about the virtual currencies exchanges and initial coin offerings (ICO). Their testimonies had a positive impact in the price of Bitcoin which rose by 11 percent from $6,955 a day before to $7,754

The cryptocurrency market seems like a wild wild west for legitimate blockchain projects as well as scams. In such an ambiguous and fast moving world, the question is whether we need a sheriff in town — like the the SEC — to bring oder or just keep cryptocurrencies free of any federal regulator. While we won’t give our thoughts on that, we are providing an overview of how the SEC is impacting crypo regulation.

The Mission of the SEC

The U.S. Securities and Exchange Commission’s mission is to:

  • Protect investors
  • Maintain fair, orderly, and efficient markets
  • Facilitate capital formation

The SEC is not only interested in the financial and regulatory aspects of cryptocurrencies, but they’re curious about the technology itself. They have an entire division devoted to blockchain technology, called the Distributed Ledger Technology Working Group (DLTWG).

Security or Not Security

The SEC’s intent to regulate cryptocurrencies has lead many to ask whether ICOs are security offerings in a traditional sense. The litmus test usually used by lawyers for the regulatory status of a digital asset is the Howey Test, originating from a legal case decided in 1946: SEC vs. W.J. Howey Co.

According to the Howey Test, all of the four following premises need to be true for an asset to be considered a security:

  1. It’s an investment of money
  2. There’s an expectation of profits from the investment
  3. The investment of money is in a common enterprise
  4. Any profit comes from the efforts of a promoter or third party

The SEC considers most ICOs as security offerings, therefore intends to regulate them to the fullest extent, as they would other securities.

SEC’s Recent Actions on Virtual Currencies

We’re seeing the SEC’s investigations spread throughout the crypto and blockchain industry, resulting in company shut downs and the SEC taking initial stabs at regulating. Here are some of their most recent movements.

April 2, 2018

SEC busts fraudulent ICO endorsed by Floyd Mayweather — founders defrauded $32M. (Coin Telegraph)

March 7, 2018

The Divisions of Enforcements and Trading and Markets from the SEC issued a statement on Potentially unlawful online platforms for trading digital assets. (SEC.gov)

Dec. 11, 2017

SEC Chairman Jay Clapton made a statement on ICOs and cryptocurrencies, where he expressed his general view on the markets targeted to two main groups. (SEC.gov)

  • Main Street investors
  • Market professionals (broker-dealers, investment advisers, exchanges, lawyers and accountants — whose actions impact Main Street investors)

July 25, 2017

The SEC’s Distributed Ledger Technology Working Group (DLTWG) reported that offerings from the DAO (Decentralized Autonomous Organization) were securities and subject to securities regulations. This report, among with other issues including security loophole in the platform led to the fall of the organization. (SEC.gov)

The Bright Side

The SEC is doing its job as described in its mission: Protect investors and maintain fair, orderly, and efficient markets. In doing so, it has issued many warnings to the public about ICOs. Chairman Clayton asserted:

“These warnings are not an effort to undermine the fostering of innovation through our capital markets — America was built on the ingenuity, vision and spirit of entrepreneurs who tackled old and new problems in new, innovative ways. Rather, they are meant to educate Main Street investors that many promoters of ICOs and cryptocurrencies are not complying with our securities laws and, as a result, the risks are significant.”

As talk of regulation continues, there are a variety of key players emerging from within the cryptocurrency ecosystem who are solely focused on regulation and compliance, and educating the public. Here are a few of them:

Harbor

This company is using smart contracts to decentralize the compliance protocol in hopes of creating a global standard for issuing and trading crypto-securities on the blockchain. The company’s first project is a new open source technology (R-Token) to help resolve the compliance challenges and alleviate the burdens of tokenized securities.

BitLegal

BitLegal tracks the evolving regulatory landscape of digital cash/bearer assets and distributed ledger technology around the world. This includes tracking both cryptocurrencies and promissory notes, bonds, equities and the like with a goal of providing greater clarity and perspective to users, regulators and those interested in the industry.

Coincenter

Coin Center is a washington D.C non-profit research and advocacy group focused on the public policy issues facing cryptocurrency and decentralized computing technologies, like Bitcoin and Ethereum.

Coin Center’s framework touches three important aspects of cryptocurrency regulations: Education, Research and Policy Making. As such, their goals are to:

  • Educate policymakers and the media about cryptocurrency technology.
  • Engage in policy research to develop smart regulatory approaches to questions raised by the technology.
  • Advocate for those solutions in order to keep cryptocurrency networks open, decentralized, and permissionless.

Looking Ahead

The legal and regulatory framework related to virtual currencies is evolving rapidly in this ambiguous space. Given the recent actions to either punish bad actors in the market or educate the public on potential risks, we can assume there will be a lot more to come.

As blockchain and cryptocurrency technologies mature and become mainstream, the SEC will most continue to develop regulations.

So what are we all to do? Arianna Simpson, Managing Director at Autonomous Capital, summed it summed it up during a podcast interview with Unconfirmed. She says that there are two main approaches to take when it comes to regulation:

  1. Bury your head in the sand like an ostrich and pretend that regulation do not exist or apply to you, or…
  2. Get your ducks in a row and do diligence to stay regulation-compliant

Why? Not only is the SEC on a mission to regulate, but a number of other federal agencies are monitoring the progress of Bitcoin and other virtual currencies. There are four others:

  • IRS
  • DOJ
  • US Congress
  • CFTC

We will continue sharing educational content around regulations and the evolving legal landscape. Our hope is to help educate the public on what’s happening so we can all be more involved and effective.