So, I listened intently to Jay Clayton, the SEC Chairman, talking to CNBC's Bob Pisani, last week.
I was hopeful at first. But, as the short interview ensued, I lost my optimism. Here's what I got from the first 5 min and 10 seconds:
I’ll start from the good stuff – He seems like a nice, reasonable guy. Also, he started off by saying the DLT is great and has a huge promise, not only in financial markets [although he augmented this remark with very weak examples of non-finance benefits, stating “efficiencies in many other markets”. Efficiencies? Really? Is that the best you could muster?] At this point I was still hopeful.
He gave what felt like a well-rehearsed, seemingly simple statement along these lines: 1) Cryptocurrencies that are replacing sovereign currencies [FIAT] are not securities. 2) A token, a digital asset, where I give you my money and you go off and make a venture and in return for me giving you my money you say “I’m going to give you a return” or “you can get a return in a secondary market by selling the token to someone”. Now, you hear this and think, finally a straight shooter that speaks plain English. But then you think about it and realize that this seemingly unambiguous statement is not that simple. Here’s why:
It seems the SEC is telling us that if you issue your own cryptocurrency, you should be OK but if you call it a token, we’re gonna look into it. I’m not being coy. Hear me out. He discerned cryptocurrency from token for a reason – because, as you will see, the other distinctions don’t hold up.
“A token, a digital asset” – don’t know about you, but for me, adding a pause and saying “a digital asset” did not bring me closer to understanding what he thinks a token is.
“Where I give you my money” – that bit I understand. He said in the beginning that their job is to protect the “mainstream investor”. I think he means non-professional investors (not qualified) and I’m fine with that. The problem is with the second part of the sentence: “and you go off and make a venture”. He later repeats this and refers to a person and his colleagues that are setting up this venture that is based on this money. Now, what if there is no such person. What if it is a growing, changing community of people? My gut says that if I asked him, off camera, he would say, if the money is not raised to fund the venture, you’re in the clear. We’ll circle back to that later.
Then he talks about a promise of return - “I’m going to give you a return” or “you can get a return in a secondary market by selling the token to someone”. That little “or” between the two parts is very important. Say that I develop a cryptocurrency (not a token, I promise (although all cryptocurrencies are tokens and digital assets – but whatever)) and say that I do a TGE and offer it to the world (god forbid, it’s not an ICO). And say that I give this crypto a starting value – so if someone wants it, they have to buy it. And say that this money is sitting in a wallet and is used for developing the tech platform that issued this currency. And say that people start trading that crypto, in secondary markets and they make returns – just like in trading forex. And say that its value starts fluctuating or even rises. So, as long as I do not call it a token and as long as I do not promise that for the money you paid I or my colleagues or the venture we might build will give you the investor a return, it’s not a security. But what happens if you can trade it on secondary markets? According to the security definition, I might now have a security on my hands, because now people will trade it and it may appreciate in value and provide a return. Or perhaps not, because I did not promise it? So, is that the test? Me promising it? Bitcoin is traded in secondary markets.
I do not want to belabor the point – Perhaps I already did. Ok, here’s the point. If you really think about it, any sovereign currency meets the SEC’s conditions for being a security. The issuer, in most cases the government, is telling me and the rest of the world, buy our currency – and you will not only not lose money you will make money, because me and my colleagues will do whatever is in our power to make our currency strong. And we’re going to do that by developing and growing our venture, oops, sorry, our national economy. And we’re gonna do that by applying international trade strategies that will support this currency (compete?) and we’re gonna do that by furnishing our debt. All of these actions are classic corporate actions meant to keep the price of a stock growing. Moreover, state bonds are build on these very premises and the currencies are traded over the counter in forex exchanges. Every euro, ever Yen, fir the SEC’s vague definition of a security.
Last but not least – he said at least three times “We have been doing this for a long time”. At first, it seemed he said it to calm us down. Basically, sending a message of "It's not complicated - play fair and you'll be fine – we know what we are doing". But then he repeated it over and over again. Sometimes it felt it was his "go to" when he needed a sec (no pun intended) to gather his thoughts. In other times, he just looked smug - and his smug smile did not help...
I don’t care that you have been regulating securities for a long time – do your homework and set up a “red team” every now and then – you know to challenge your thinking and shake things up a bit.
I said it wasn’t all bad and it wasn’t.
The gist of what he said was clear and true.
Most ICOs that I have seen are designed to raise money to fund a venture and as such, they are clearly securities. They fit the definitions he gave unambiguously. I think these types of ICOs should file with the SEC.
He also made it quite clear that if you are developing a platform and you can show that the cryptocurrency you designed for that platform behaves in a way that does not make its primary function to be raising money for a venture in return of a promise of a return than you should be in the clear. And I think that if people do decide to trade it in secondary markets and they do make returns, you should be able to claim that that is their business. I would also advise
ICOs to stop calling themselves ICOs and change the use of the word token into cryptocurrency. You make think it’s stupid (I do) but it is a matter of declaring your intentions.
Remember, the job of the ICO is top protect investors – try not to fuck investors over and you should have a stronger leg to stand on.
My 2 cents.
Shahar