Although there hasn't been much in the way of regulatory action, it seems that something is starting to brew in the United States government with regard to the regulation of Cryptocurrencies and ICOs. The crypto market is booming bigger than ever before, and with the hype have come a few high-profile cases of ICOs gone wrong.
Tezos has been hit with several class-action lawsuits seeking refunds for ICO participants who were allegedly misled regarding whether or not the tokens they purchased during the ICO were securities. The Confido ICO exit scam resulted in the involvement of the FBI.
More recently, the SEC successfully forced the shutdown of the Munchee ICO. ‘MUN’ tokens were found by the SEC to be legally classified as securities, and it was subsequently determined that Munchee was not following US securities laws appropriately. Munchee, which was raising funds for an app that would act as a Blockchain -based platform for restaurant reviews, was forced to refund its ICO participants.
Additionally, the founder of PlexCoin was sentenced to a two-month sentence in a Canadian prison after failing to follow orders from the Canadian government and the SEC to cancel the sale and freeze assets.
While cases of the US government taking action against ICOs are still rather few and far between, the frequency of such incidents is certainly increasing. The US government has not taken any strong action to place sanctions on cryptocurrency in general, but the government's awareness surrounding the world of crypto seems to have been heightened.
Warnings, But No “Rules” - Yet
On December 11, SEC Chairman Jay Clayton issued an official statement warning of the risks associated with ICOs and cryptocurrency in general.
Acknowledging the crypto hype, Clayton wrote that global social media was abuzz with “tales of fortunes made and dreamed to be made.” However, Clayton also cautioned: “If an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution.” Clayton specifically mentioned ICOs that promise returns as being particularly suspicious.
While Clayton’s statement reflects what seems to be the SEC’s strongest and most direct sentiments about cryptocurrency yet, the statement does not completely condemn the practice. Rather, the statement seems to encourage investors to think very critically about what they are getting themselves into.
Near the beginning of the statement, Clayton provides a sort of investigative guide with questions that an investor should be able to answer before participating in an ICO, including: “Is [the cryptocurrency purchased during the ICO] subject to regulation, including rules designed to protect investors? Does the [cryptocurrency] comply with those rules?” An additional list of questions was attached to the statement.
The statement was divided into two sections to address two audiences: ‘main street’ investors and institutional investors. Main street investors were advised to “be open to these opportunities, but to ask good questions, demand clear answers, and apply good common sense when doing so.”
In addition to encouraging investors to acquaint themselves with the risks of possible hacking and other illegal practices, Clayton went on to explain that because ICOs often happen on a transnational basis, the SEC “may not be able to effectively pursue bad actors or recover funds.”
Are Tokens Securities? Well, Maybe...
While no explicit legal status has been given to cryptocurrencies in the United States, the regulatory attitude seems to be pointed toward treating cryptocurrencies (including tokens purchased through ICOs) as traditional securities. It all began in July, when the SEC started an inquiry into the hacking of the DAO ICO - an incident resulting in the loss of $50 million.
Rather than attempting to identify the hacker behind the attack, the SEC sought to determine whether or not the tokens purchased during the DAO ICO were legally classified as securities, and thus, whether or not existing securities regulations applied to them.
The statement that the SEC released on the matter was ambiguous, essentially expressing that whether or not a particular kind of crypto token could be legally treated as a security was context-dependent:
“U.S. federal securities law may apply to various activities, including distributed ledger technology, depending on the particular facts and circumstances, without regard to the form of the organization or technology used to effectuate a particular [cryptocurrency] offer or sale.”
According to a report from Stansberry Churchouse, the criteria to determine if a transaction counts as an investment contract are listed in something called the Howey Test. The Howey Test was designed specifically for this purpose by the US Supreme Court, and says that something can be considered a security if:
It is an investment of money.
There is an expectation of profits from the investment.
The investment of money is in a common enterprise.
Any profit comes from the efforts of a promoter or third party
The Worldwide Push for Regulations and the Trump Administration
The SEC’s latest statement comes in the context of a worldwide push to regulate cryptocurrencies and their accoutrements, including the practice of holding ICOs. ICOs were the first target of the sweeping set of Chinese crypto bans that eventually led to the forced closure of all of the domestic cryptocurrency exchanges in China; South Korea was soon to follow.
India, Malaysia, Gibraltar, the Philippines, Mexico, are just a few of the nations currently passing crypto-related laws through their respective legal systems.
With the exception of a few higher-profile cases of questionable or fraudulent ICOs, the United States government has remained relatively silent on the subject of cryptocurrencies and the practice of holding ICOs compared to other countries with similar global standing. Interestingly, however, the Trump administration has exhibited a rather friendly attitude toward the world of cryptocurrency.
In September of this year, CoinDesk reported that two senior White House officials who spoke at the Data Transparency 2017 conference explained that blockchain technology was under close consideration in relation to US policy.
Margie Graves, the acting Federal Chief Information Officer of the Office of Management and Budget (OMB), said that “with artificial intelligence and blockchain, the [White House] is exploring a whole range of forward-leaning capabilities that might be helpful to the government."
Additionally, the man appointed as the Director of the OMB is none other than Mick Mulvaney, a noted libertarian and Bitcoin enthusiast in the US Republican party.
According to an October report from Business Insider, the United States federal government “has not exercised its constitutional preemptive power to regulate blockchain to the exclusion of states...or even expressed intention to do so, regardless of the interest of federal agencies.”
As a result, the decisions as to whether and to what extent cryptocurrency will be regulated in the United States are currently in the hands of the individual states themselves. So far in 2017, a minimum of eight US states have worked on passing bills related to cryptocurrency regulation. Several other states have already enacted legislation, including Arizona’s House Bill 2417, which said that the data in a blockchain is "considered to be in an electronic format and to be an electronic record."
For now, it seems that the US government has a rather balanced attitude toward cryptocurrency, and a good understanding of the possible benefits of the adoption of blockchain technology into its existing systems. As Bitcoin and cryptocurrency continue their journey as pop cultural, financial, and political movements, the next year will be a crucial time to determine what the country’s policies regarding crypto legislation and taxation will be.
