June 14, 2018, was the day when the director of corporate finance at Securities and Exchange Commission (SEC) caused a ripple in stable cryptoasset waters. At Yahoo Finance’s All Market Summit, the made a comment stating that Ether is not a security. Following the statement, Venture Capital Working Group, an association of lawyers, traders and crypto enthusiasts, gathered to meet with the SEC to view virtual assets as “utility tokens” rather than securities.
Why ‘utility’ tokens?
Utility tokens offer more practical uses than securities. Through utility token, customers can gain direct access to a company’s products or services and they are generally exempted from SEC rules. Securities, however, t often represent stakes in a company’s offerings. Customers can garner capital or profit by investing in securities, but this subjects them to regulatory scrutiny.
Why do Securities exist?
Securities regulations primarily exist in order to ensure that the third party is informed to an extent, where they can judge whether there is safe investment guarantee or not, without compromising trade secrets that the promoter firms often want to avoid making public.
It doesn’t seem like the SEC are willingly going to bend any rules in order to approve cryptoassets as securities.
“We are not going to do any violence to the traditional definition of a security that has worked for a long time,” Jay Clayton explained to CNBC. “There’s no need to change the definition. A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say ‘you can get a return’[;] that is a security and we can regulate that. We regulate the offering of that security and regulate the trading of that security.”
Following the statements made publicly, crypto investors started questioning if the world’s second largest cryptoasset, Ether, would be gravely affected?
Nigel Greene, CEO and founder of the investment firm deVere Group says, “ Clayton’s stance on ICOs and cryptocurrencies is a positive sign that digital assets are becoming more mainstream”.
Analysts generally said that the SEC’s focus is more on digital coins and less on Bitcoin, as the former is being released through fundraisers known as token sales or initial coin offerings. They have increased efforts to unveil fraudulent initial coin offerings, which tend to promote returns to investors and have collected billions of dollars on a global scale.
Cryptoasset might have the potential to substitute dollar, sterling, yen, and euro. The SEC believes tokens that act as digital assets are securities. This clears a small percent of uncertainty any crypto enthusiasts and investors might have or had. It is possible that the SEC, government, central banks are now recognizing the scale and potential of Bitcoin along with other cryptoassets.
Back in February, Jay Clayton said in a Senate Banking Committee hearing that he is open to exploring with Congress whether increased regulation of cryptoasset trading platforms is necessary or appropriate.
Debates are in motion and speculations are in full swing. Are cryptoassets securities or not? While people voice opinions and theories, CEO of Bank of America, Brian Moynihan and, Nasdaq Inc. CEO, Adena Friedman recently addressed the issue at the MIT conference in New York City. Adena Friedman said that initial coin offerings should be governed by securities laws. She also said that retail buyers deserve protection if they are going to invest in products. Moynihan warned that digital assets could be used dangerously and unlawfully.
Of course, if managed right, blockchain technology could be a blessing for financial innovation. It possesses the potential to lower costs, economic rents. However, there are security concerns and maybe some laws are necessary to ensure customer security.