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Diego Zuluaga is a policy analyst at the Center for Monetary and Financial Alternatives at the Cato Institute.
The Securities and Exchange Commission, the largest regulator of the world's largest capital market, is grappling with the question of how to regulate cryptocurrencies for more than two years. Yet by mid-2019, more than 10 years after the birth of Bitcoin, he can no longer claim to have made much progress.
The latest example of the SEC's ambiguous approach is the launch of a crackdown on Kik Interactive, Inc. Kik is a social media platform that has begun issuing its own cryptocurrency (Kin) in mid-2017.
Prior to the law, Kin's market capitalization was $ 40 million – a tiny amount compared to the larger $ 245 billion cryptography market, which is itself a tiny fraction of the world's largest market share. billion dollar market value of stocks and bonds listed in the United States.
The SEC's mandate is to sue individuals and companies that issue securities without registering the offer or adhering to an exemption. But until now, the Commission has provided no reliable indication as to the criteria it uses to determine if a token is considered security.
Major SEC spokespersons, including President Jay Clayton and Corporate Finance Director Bill Hinman, have made divergent statements. More generally, the SEC has repeatedly reiterated that it would judge future business based on their individual "facts and circumstances," which has not helped market operators to understand its overall approach.
What is missing is a clear statement of the circumstances under which a symbolic offer is not an offer of securities. The SEC has not provided a solution for cryptographic transmitters that – as seems to be the case for Kin's promoters – do not wish to offer security and wish to make this clear to potential buyers from the outset.
Mixed signals
Just last year, President Clayton said that "all country offices [initial coin offerings] [he’d] seen [were] securities. Yet, for more than 12 months, the SEC has taken three dozen enforcement actions against digital asset issuers. This represents less than 10% of the 434 OICs reported in the SEC's 2017 Kin complaint, based on CoinDesk figures. In addition, many of these three dozen involve outright fraud, not just unregistered offers of securities.
To my knowledge, Clayton has not yet changed its previous statement. At the same time, Hinman said in a speech that if a cryptocurrency was sufficiently decentralized, it would not meet the SEC's definition of security, which implies a joint venture and profits generated solely by people's efforts. other than the owner – the so-called Howey test.
A long-awaited guide to digital asset offerings sought to describe, in simple terms, the SEC's procedure for deciding whether a symbolic offer was an SEC-regulated investment contract. Unfortunately, these tips have turned the 70-year-old Howey test into a more than 40-point list of reasons why the SEC might view a symbolic offer as an offer of securities. The guidelines also introduced new concepts, such as "active participant," which no doubt broaden the scope of the Howey test beyond what the courts have already interpreted.
Even SEC insiders have criticized these indications. Commissioner Hester Peirce, one of the strongest voices in the SEC on innovation and clarity, warned that the guidelines could unduly widen the Commission's mandate in regulating cryptocurrency and discouraging innovators from doing business in the United States.
Fleeing the USA
Indeed, major players in the sector, such as Binance and Circle, have already totally or partially geo-blocked the IP address of the United States to use their services. Businesses and talents have moved to more user-friendly jurisdictions, such as Singapore and Switzerland. US consumers and investors have been forced to forgo participating in what could be a beneficial innovation to which they are entitled to participate. Given the prominence of the United States as a financial and technological hub and the considerable size of the US consumer and investment markets, this change in geographic location appears to be primarily due to regulatory failure. As the leading and most aggressive regulator of cryptocurrency, the SEC has unintentionally prolonged regulatory uncertainty.
Kik and his supporters see SEC enforcement as a means of clarifying the cryptography industry and have created a legal defense fund for this purpose. They argue that Kin has not been marketed as a cash investment, but rather as a means of trading on the Kik platform and as a reward for the performance of certain activities on this platform. Kik also challenges the centralization statement of the SEC and denies that users could have expected benefits based on promoters' efforts.
The question of whether these arguments will persuade the court is an open question. Kin's offer certainly shares certain characteristics with other ICOs, such as Munchee, which have already settled with the SEC and returned the funds raised to their investors. The language used by Kin's representatives and in the 2017 token submission documents also alludes to a joint venture and the possibility of quick returns, two parts of the Howey test. These statements could reinforce the prosecution's contention that Kin meets the Howey test.
Regardless of the outcome of the securities law violation, a court may attempt to define decentralization by finally providing a reliable standard for determining cryptography projects that fall under the jurisdiction of the SEC. The court is not the only way for more certainty. Legislative efforts, including the Token Taxonomy Act, are intended to provide a legal definition of the digital token that, in specific and clearly defined circumstances, would not fall within the purview of securities laws. I have also proposed a framework for dealing with functional cryptocurrencies as commodities and offering an exit of securities registration for non-functional tokens fulfilling certain conditions, while retaining the existing rules for the tokens responding to the Howey test.
Over the last two years, the SEC has missed several opportunities to provide clear and consistent guidance on the regulatory status of cryptocurrencies. This inaction has unnecessarily prolonged uncertainty and created mistrust and fear among market players. The effects of this failure on US leadership in financial innovation are likely to be sustainable.
Kick the image of the road via Shutterstock
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