In crypto years, the July 25th report by the US Securities and Exchange Commission (SEC) on the DAO ICO probably feels like ancient history to many industry observers. Much has been written about it and the flavor of a lot of that comment has been that the gold rush is over.
For many, that interpretation was reinforced soon after the SEC’s report by the Chinese government’s decision to ban ICOs altogether - and give them the nasty name of “illegal financial crimes” to boot. Even Gibraltar got on the bandwagon - with its Financial Services Commission announcing on September 22nd that it was “considering” a regulatory framework “covering the promotion and sale of tokens.”
One could be forgiven, then, for thinking that moves like these are the beginning of an international legislative snowball, with more and more jurisdictions piling on and effectively wiping out a novel and exciting new capital raising method before it really even got started. For those in that camp I say simply - relax, that’s not going to happen.
Why? Because an outcome like that would be at odds with the fundamental mission of regulators like the SEC in the US, the FCA in the UK, and ASIC in Australia (ASIC issued its own guidance document on September 28th). Overall these organizations have two main goals. One is to ensure that the financial markets work efficiently - in so doing helping ensure a reliable flow of investment into the respective country’s economies. And the other is to try and prevent mom and pop investors from losing their shirts.
Filtered through that lens, the SEC ruling and the Chinese declaration might be better viewed as the end of the beginning - and not a moment too soon some would say. Because from a certain standpoint, the ICO sector has been lucky. Yes some big money has been raised, but it hasn’t been crazy money. To put it in perspective, in 2016 the traditional global venture capital sector secured US$127 billion in funding compared to around US$120 million for ICOs (not including The DAO).
In 2017 ICOs have picked up steam but still only amount to a tiny fraction of total venture capital funding. In terms of widespread public awareness, from the perspective of the average person this is all a giant mystery anyway. If they have heard about cryptocurrencies at all, it is Bitcoin and they only heard about that five minutes ago. Bottom line - mom and pop investors probably haven’t lost their shirts - yet.
But they were about to. While getting a haircut last weekend I overheard a discussion between two women about “buying some bitcoins.” “Should I buy the big one or the small one?” asked one woman, to which the other responded, “it doesn’t really matter, as long as you can get 20 people to buy in after you, you’ll still be able to make $180,000 in a couple of months - my friend has done it four times in the last year.” Clearly what they were describing was a classic pyramid scheme that some unscrupulous con-artist had branded Bit-something or other.
Although there’s little that the SEC and other regulators can do to stop straight up con-jobs like this, it does illustrate the point that potentially a great many completely unsophisticated investors were about to dive into investing in ICOs, and the decision of the SEC and other regulators to pour some water on the fire was timely and appropriate.
So where will it go from here? My guess is continued stern warnings from regulators, but little in the way of entirely new legislation. What is likely, however, is the expansion of existing securities laws and regulations to cover token offerings. This will mean things like offer registration, comprehensive disclosure, and compliance with the full gamut of investor protection laws. While this isn’t good news for anyone hoping to raise millions with little more than the sniff of an idea and a marketing White Paper, I’d argue their loss is the wider crypto sector’s gain. Yes, the gold rush might well be over - but the real business is just getting started.