Thursday, February 2019
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Security Crypto-Tokens Really Are Securities
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Security Crypto-Tokens Really Are Securities

Here are two pieces of extremely unsurprising news. First, “a federal judge has ruled that U.S. securities laws may cover an initial coin offering” in a criminal fraud case against a man charged with promoting dodgy cryptocurrencies. This is unsurprising because the Securities and Exchange Commission has been saying for months, in public pronouncements and also in enforcement actions, that ICO tokens can be securities, and that most of them are. It is also unsurprising because it is obviously correct. But now at least one federal court has agreed with the SEC on this, which is something.

Second, the SEC brought (and settled) an enforcement action against a thing called “TokenLot LLC, a self-described ‘ICO Superstore,’” charging it with acting as an unregistered broker-dealer. The SEC has, again, been saying for months that ICO tokens can be securities, and that most of them are, and it has freely brought enforcement actions against ICO promoters for conducting unregistered securities offerings, which is illegal. Logically, if that is the law, then people who operate crypto platforms that allow people to buy and sell unregistered ICO security tokens are acting as unregistered broker-dealers (or unregistered securities exchanges), which is also illegal.

This is completely unsurprising as a legal theory, but it is an important extension of the legal risk of ICOs that sell security tokens without registering them: The legal risks are not just for the people doing the ICO (and collecting the proceeds), but also for the people running the trading platforms (and collecting only trading fees). Crypto exchanges and brokers have to diligence whether the tokens they list comply with the securities laws; if they don’t, then the exchanges and brokers are also at risk.

Anyway this is a big week for crypto enforcement. In addition to those two cases, there’s another SEC enforcement action against a crypto hedge-fund manager that “raised more than $3.6 million over a four-month period in late 2017 while falsely claiming that the fund was regulated by the SEC and had filed a registration statement with the agency.” And here is a Financial Industry Regulatory Authority disciplinary action — its first involving crypto — against a guy who allegedly “attempted to lure public investment in his worthless public company, Rocky Mountain Ayre, Inc. (RMTN) by issuing and selling HempCoin – which he publicized as ‘the first minable coin backed by marketable securities,’” a really impressive amount of nonsense in one sentence.

Further afield, the International Monetary Fund told the Marshall Islands to “seriously reconsider” launching its own sovereign cryptocurrency, in a country report finding that “the potential benefits from revenue gains appear considerably smaller than the potential costs arising from economic, reputational, AML/CFT, and governance risks.” The report is fascinating in part because it imagines the Marshalls’ cryptocurrency — the “Sovereign” — as actual currency:

SOV issuance in the currently planned form and in the absence of a monetary policy framework could also result in monetary instability and pose significant challenges to macroeconomic management. The SOV will, by design, be an international currency and subject to large volatility in its exchange rates. The challenges would be amplified by the planned distribution of SOVs to citizens, which would be equivalent to a monetary expansion through “helicopter money.” Depending on the exchange rate of the SOV against the U.S. dollar at the time of distribution, the implied transfer of purchasing power could be significant and require a sizable reduction in other government spending to prevent an unsustainable increase in aggregate demand. And as the SOV can be used to settle debts and taxes, the government and banks could experience adverse balance sheet effects and face U.S. dollar liquidity risks under currency convertibility.

Imagine if an air-drop of a cryptocurrency actually led to “an unsustainable increase in aggregate demand”! I feel like that would be a pretty impressive accomplishment, for a cryptocurrency. Anyway the IMF is also worried about money laundering, cybersecurity, and an assortment of general dodginess.

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