On July 25th, the Securities Exchange Commission (SEC) finally made a play in the world of digital currency.
And it was a fairly aggressive play.
The SEC declared that virtual companies, specifically those generating funds through initial coin offerings (ICOs), have to obey federal laws.
Furthermore, any token released in an ICO might be considered a security and would have to be evaluated by the SEC for investor risk.
Ether (ETH) and Bitcoin (BTC) are still considered currencies.
This news sent tremors throughout the digital currency world, with many coins dropping by 10%.
More than likely, this drop was the result of standard volatility rather than of the SEC ruling. The ruling will likely affect virtual companies far more than the dominant currencies.
That said, every digital currency investor should be informed about the SEC decision. It could have far-reaching implications for the developing digital currency sector.
On a positive note, it should help protect investors, decrease volatility, and transform the "Wild West" world of digital currency into something a bit tamer.
But before we get to that, let's talk about ICOs and how they got to be a major thorn in Ethereum's side.
A Brief History of ICOS
Over the last few months, there has been a rise in the volume of initial coin offerings.
A virtual company issues an ICO when it's trying to generate funds. Basically, in return for ETH or BTC, a virtual company gives an investor a "token." Investors who put funds into these ventures often hope to get in early on technologies that could be the next Bitcoin or Ethereum.
So far, ICOs have managed to raise more money than many professionally executed crowdfunding ventures. The chart below illustrates just a few of the most recent (and most valuable) ICOs:
Just glancing at this chart should reveal a major issue. That's a lot of unregulated funds. And with that comes a bounty of investor risk.
Back in March, Wealth Daily covered the basics of ICO investing.
At the time, though the underlying impact ICOs would have on existing digital currencies was questionable, the ventures seemed like good opportunities for diligent investors who were willing to do research.
But this was not the case. Within a month, it was apparent that ICOs would have powerful effects on the digital currency world.
Many of these virtual companies were hacked, which caused millions of dollars to be stolen from investors. Or there was an issue with a company's token distribution (leaving investors without tokens to reflect their Ethereum and Bitcoin investments).
The most notable event in recent news was the Coindash ICO. On July 17th, when the company was in the middle of its ICO, hackers took control of the website and stole $7 million worth of ETH.
All that considered, you can't blame the SEC for stepping in.
But now, with this decision made, what can investors expect to see in the immediate future?
What Does the Sec Ruling Mean for ICOs?
The exact consequences of the SEC ruling will take some time to uncover. But some things should be made immediately clear in the coming waves of ICOs...
Some ICOs Might No Longer Allow U.S. Investors.
The U.S. government is the first federal government to take a stand against ICOs. And it would seem that many virtual companies issuing tokens saw this coming. In fact, recent virtual company EOS (which is still in its ICO) refused to accept funds from U.S. investors.
This could become a trend for companies looking to avoid the regulatory wrath of the SEC. These companies may just do coin offerings outside of the U.S.
So, U.S. investors might stop being able to participate in ICOs, even if the investing trend continues overseas.
And then there is the bigger issue: A bulk of digital currency investors, as trading volume clearly reflects, are only interested in Bitcoin and Ethereum.
During the ICO boom, investors were buying Ethereum and Bitcoin to invest in ICOs, which led to price surges and instability. Now, with ICOs facing regulation from the U.S., many investors are hoping that Ethereum and Bitcoin will stabilize.
How Is the SEC Ruling Going to Affect the Prices of Bitcoin and Ethereum?
At this point, it's too early to rush any judgment calls. But logically, this is the way things should play out...
ICOs will continue to happen — if not in the U.S., then overseas.
If this is the case, it's likely that Bitcoin and Ethereum will still be influenced by ICO funding rounds. But the U.S. market is a huge digital currency market and regulating it will likely reduce the volume of BTC and ETH being used for funding.
Bitcoin has utility as a hedge against disaster and currency.
This is why many people have compared it to gold, praising it as the "new gold."
Its utility has not been undermined by ICO offerings, and Bitcoin will likely continue to rise as investors seek to protect themselves from global economic turbulence.
Ethereum, though less established than Bitcoin, still has utility from fueling a massive blockchain network. In that, it's not likely to disappear off the face of the earth.
But regulating ICOs in the United States may help with price surges.
Many of Ethereum's price surges happened alongside major ICOs. Then, when those ICOs either locked up Ethereum in smart contracts or liquidated it for federal currency, the price of Ethereum dropped sharply.
In the wake of the SEC announcement, investors should focus on educating themselves on the happenings in the digital currency market. We are still at the start of a massive paradigm shift. Even the SEC acknowledged that digital currency is here to stay, with lead officials speculating on high Bitcoin valuations by 2020.