The Token Trading Game to End Soon
“I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.” Jay Clayton, SEC Chairman
It is clear now. The SEC views most of the utility tokens as securities. Jay Clayton the SEC chairman said so on November 9 at Institute on Securities Regulation in New York. You can read the entire speech.
The SEC is a sleeping giant and just waiting for the right moment to start enforcement actions. Maybe ICO issuers are hoping they will not be on the target list. However, it is impossible to know how far the SEC is going to go.
What has not been discussed much is how investors in ICOs are able to trade their utility tokens. It is clear that the access to liquidity has made those tokens very attractive. It has also created a prime ground for “pump and dump” schemes by unscrupulous investors. They purchase the utility tokens privately and confidentially at up to 90% discount and then dump them once the tokens are traded.
“There is also a distinct lack of information about many online platforms that list and trade virtual coins or tokens offered and sold in initial coin offerings.” Jay Clayton, SEC Chairman
Trading platforms like Coinbase’s GDAX, Bittrex, and Shapeshifter could be next on the enforcement list. Again, Jay Clayton’s most direct observation were made towards the unregulated trading platforms.
“Trading of tokens on these platforms is susceptible to price manipulation and other fraudulent trading practices. ICOs may be securities, and those who offer and sell securities in the United States must comply with the federal securities laws. Any person or entity engaging in the activities of an exchange must register as a national securities exchange.”
This is really bad news for these trading platforms — worst of all is GDAX, one of the most popular platforms that recently released its own compliance and governance document called the GDAX Digital Asset Framework. Talk about bad timing and also clear defiance of the views held by the SEC. This document clearly details how an ICO should avoid registering and staying a utility token so GDAX can safely trade it. In section 3.1 they write under compliance obligations, “The asset would not affect Coinbase or GDAX’s ability to meet compliance obligations.” goes on to explain they are not required to perform any anti-money laundering or know your customer verification. Imagine, they could potentially help drug lords launder money, or worse, terrorists.
They emphasize the idea that investors purchase utility tokens for “participating or spending the tokens” when there is no clear evidence that investors have any interest in the utility of the token they invest in. They want to use GDAX to make money.
It is really interesting to see that platforms such as GDAX have a great desire to regulate their own exchange similar to how the SEC regulates registered exchanges in the United States. The main difference is that GDAX has absolutely no legal basis for a self-regulation effort when it is the role of the SEC to do so. This parallel universe is not lost on the regulators who at some point in time are going to enforce their rules with no mercy shown to those who violate them.
Companies that issue utility tokens now have a clear framework to follow. It’s written and published by GDAX, the giant trading platform that is perhaps aiding and abating these companies to transform a security token into a utility token. The idea they would publicly publish this type of fictional compliance document speaks for itself and could be viewed as total disregard to the U.S. regulation institutions.
Time will tell, but the trading game is going to need a transformation into regulated marketplaces in order for the investors to feel confident the rules are fair, the marketplace is regulated, and fraudsters are held accountable. Companies such as T-zero or StartEngine Secondary are building the ICO 2.0 infrastructure necessary for this next phase. This comes at a great deal of costs to meet regulation and compliance. Will the ICO investors accept to pay a small premium for this level of trust?
It’s possible. At StartEngine, we saw record numbers of attendees at our first ICO 2.0 Summit. The buzz and interest seems to indicate that companies and investors alike are ready for ICO 2.0. Watch the panel discussions from great speakers on the StartEngine YouTube channel.
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