Regulators are looking at bitcoin more favorably, and that’s a good thing

On Feb. 6, the Senate held a hearing on “initial coin offerings” in cryptocurrency at which the chairmen of both the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) testified with a clear understanding of cryptocurrencies, blockchain technology and the dangers of impulsive regulation.

While the Twitter crypto crowd was ecstatic with the testimonies, demonstrated by tweets like “SEC and Bitcoin sitting in a tree, K-I-S-S-I-N-G!” from CryptoCoinNews, the signs were clear that the community must be careful.

{mosads}Blockchain technology is taking the internet to a new level, making it a more secure, efficient, trusted and democratized ecosystem. Blockchain will evolve societies and create everlasting changes to our economic systems. Governments, regulators, businesses and individuals seek education on blockchain and its potential.

Unfortunately, while many are focused on the social good and wealth creation opportunities, inexperienced and over-exuberant participants may be running afoul of securities laws and still others exploiting it for scams. When it comes to ICO gatekeepers, in the words of SEC Chairman Jay Clayton, “they can do better.” We agree.

Two weeks prior to the Senate hearing, six leading ICO attorneys delivered a presentation on the “Present State of Blockchain and ICOs” to 21 members from the SEC including the divisions of trading and markets, corporate finance, investment management and the Office of the Chairman. The presentation included a list of questions assembled from key industry legal, financial, and technology participants, related to ICOs and suggesting points of clarification from the SEC. In our view, the SEC should continue with caution to nurture innovation, while pursuing clearer ICO guidance.

Our presentation to the SEC reviewed that 2018 will be a year of continued ICO growth and major production implementations of Blockchain systems in utilities, banks and brokers. Regulatory issues were discussed in the context of this significant growth and our takeaway is an expectation that the SEC will combine clarity for the industry with disciplinary action against those acting improperly. Specifically, exchanges operating without the proper licenses and underperforming ICO gatekeepers. At the time of writing this article, fresh subpoenas have been issued to several industry participants. We believe this action will lead to further clarity around what is and is not acceptable in the eyes of the SEC.

Although Congress facilitated easier access to capital via the JOBS ACT in 2012, a perceived lack of limitations afforded by ICOs appeared to be a more favorable option. “ICOs” under the guise of utility tokens and the cover of the Howey Test created an appearance of easy access to capital from the general population with the promise of early liquidity and returns.

The pace at which ICO’s expanded since late 2017 has been stunning. With 25x sequential growth each quarter, ICO’s globally raised under half a billion in early 2017 to over $8 billion through February 2018. ICO’s have been dramatically outpacing traditional early stage venture capital investing, and as such, gained increased attention from regulators related to ICO registration as securities.

The ICO phenomenon is being addressed differently around the globe from outright bans, the approach by China, to regulatory guidance in countries like Switzerland, Malta and Gibraltar. In the U.S., regulators and the legislature have been examining relevant regulation and legislation. In 2017, the SEC worked to identify and file actions against ICO’s violating existing securities laws, focusing primarily on fraudulent ICO’s.

Although we’re very enthusiastic about the potential combination of ICO’s within the existing regulatory framework, the structure of coin offerings has taken center stage as the SEC increasingly signals that ICO token sales are to be considered securities subject to securities law and registration requirements.

As demonstrated by the recently issued subpoenas, regulation and enforcement is clearly underway. Anything that may appear to be a violation of U.S. securities laws is being or is likely to be addressed.

While regulators appear to be approaching the ICO phenomenon with caution, so they don’t potentially limit innovation, it is our view that the industry has a responsibility to marry the well-established framework of securities laws to the innovation afforded by this new technology and business model. Our colleagues may want to consider the clear words of Chairman Clayton who said he’s never seen a token that didn’t look like a security.

Lana Reeve is the chief legal officer at blockchain-focused investment fund and advisory business Maco.la Management, and Sheri Kaiserman is the company’s cofounder and principal adviser.