Oh Shit, the SEC Just Ruled That Ethereum ICO Tokens Are Securities

Some ICOs must be registered or they’re unlawful.

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Jul 25 2017, 9:46pm

Image: Flickr/Scott S. 

Recently, startups have managed to raise tens of millions of dollars—occasionally in mere minutes, and sometimes without an actual product attached—on the cryptocurrency and app platform ethereum.

Amid the gold rush, a looming concern has been: How will the US Securities and Exchange Commission see all this, and is it, well, legal?

On Tuesday, the SEC announced that tokens that are sold off in crowdfunding events known as Initial Coin Offerings (or ICOs) in ethereum may be considered securities in some circumstances, and are therefore subject to US securities law. Tokens are digital assets that investors may purchase during ICOs, and they usually have some sort of bespoke functionality—in some cases, voting rights or profit dividends—in the app the investor is buying into.

Read More: An Ethereum Token Called 'FUCK' Raised $30,000 in 30 Minutes

This decision could have huge ramifications. ICOs are currently in a "Wild West" stage as shady projects and even outright jokes are raking in tens of thousands of dollars for their founders.

As for which tokens constitute securities, the SEC concluded that the tokens people bought in 2016 to participate in the DAO—a crowd-directed investment fund that imploded after being hacked that same year—were securities. The SEC notes in its report on the DAO that token-holders purchased the tokens with the expectation of profit "derived from the managerial efforts of others," which qualified them as securities.

Since the people behind the DAO didn't register its token sale with the SEC, it was technically illegal, but the commission stated that it has decided not to bring charges against them.

Going forward, according to the SEC, companies that are issuing tokens as part of an ICO (if they are considered securities) need to register with the commission. This will force companies to comply with regulations that ask them to reveal their financial position and the identities of their management. The SEC also concluded that online exchanges where tokens are bought and traded may have to register as security exchanges.

It's not all that uncommon for ICOs, like Delphi, a cryptocurrency-fuelled futures market, to have anonymous founders. It's worth noting that this anonymity has been met with a large dose of skepticism from the ethereum community, however.

"The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets," said Stephanie Avakian, co-director of the SEC's Enforcement Division, in a statement.

Some app ICOs have already attempted to get ahead of impending SEC regulation. The Basic Attention Token, which recently raised millions of dollars in an ICO, explicitly notes that it is "not a digital currency, security or commodity." The token's stated functionality is to allow token-holders to buy ads and be paid for viewing them in a privacy-boosting browser called Brave, and doesn't confer any rights to profits or intellectual property.

Needless to say, things are about to get very interesting on the lawless digital frontier.

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