Even as his agency cracks down on token offerings, SEC Chairman Jay Clayton is letting bitcoin off the hook. Clayton, who has been vocal about regulating tokens as securities, told CNBC in an interview that cryptocurrencies do not qualify as securities under current SEC provisions. “Cryptocurrencies…are replacements for sovereign currencies, (they) replace yen, US dollar, Euro with bitcoin. That type of currency is not a security,” he said. He also indicated that his agency will not be changing its definition of a security, in order to accommodate ICOs, anytime soon. “We are not going to do any violence to the traditional definition of a security that has worked for a long time,” he said. “We’ve been doing this a long time, there’s no need to change the definition.”
Why Bitcoin Is Not A Security
To be sure, the case for bitcoin as a security was already on thin ground. Soliciting funds from third parties for a common venture is a requirement for classification as a security, according to the Howey Test used by the SEC. Bitcoin’s underlying technology is open-source and freely available to startups and developers for crafting their own version of it. As such, bitcoin development has largely been funded through a combination of research funding from public institutions and private companies and donations.
For example, Bitcoin Foundation was formed in 2014 to raise funds for future development. Soon after it declared bankruptcy the following year, the MIT Media Lab hired prominent developers, such as Gavin Andreesen, connected with the organization. Through its Digital Currency Initiative (DCI), the university is also an active contributor to the development of Layer 2 technologies like Lightning Network for scaling the number of transactions processed in bitcoin’s network. Private companies also have a vested interest in furthering research on bitcoin to develop their own implementation of its blockchain. China-based BTCC, a crypto exchange that has since shuttered, was a significant contributor to bitcoin’s code development.
Most importantly, bitcoin’s core development team has never solicited funds from the general public investors and promised future rewards to investors.
But Ethereum’s Tokens Are Still SEC Prey
That is not the case with ethereum’s tokens, which are coins that use the blockchain’s platform for smart contract transactions. Instead of approaching venture investors, startups working on ethereum’s platform are crowdfunding public capital through initial coin offerings (ICO). ICO promoters promise future appreciation of tokens listed on exchanges as reward for investors. The disclosure requirements for such offerings are minimal and, in some cases, not even required under existing SEC regulations. The high risk of investing in ICOs also translates into high rewards. A recent study by academics at Boston College found that the average ICO investor earned 179% returns after the first day’s trading. But those cases are far and few. A study earlier this year found that 80% of ICOs are scams and only 8% of coin offerings reach an exchange.
The SEC has also stepped up its game in recent times and cracked down on suspect offerings. In his interview, Chairman Clayton reiterated his agency’s intent. “A token, a digital asset where I give you my money and you go off and make a venture for some company you want to start….I give you a return (in exchange for investing in the venture). That is a security and we regulate that we regulate the offering and trading of that security,” he said.