An overarching theme for cryptocurrencies in 2018 has been developments in regulatory frameworks around the world.
From South Korea, Russia, and the United States, governments and financial regulatory bodies have been hard at work creating new frameworks that will look to settle a continually turbulent cryptocurrency market as well as initial coin offerings (ICOs).
In America, the Securities Exchange Commission (SEC) and Commodities Futures Trading Committee (CFTC) have been somewhat of a revelation for the cryptocurrency world, after a serious downturn in the markets in January 2018.
Bitcoin and almost every other altcoin saw sharp declines from December highs amid misinformation and uncertainty around the world. In the American setting, the SEC and CFTC hearing in February provided a lifeline for cryptocurrencies and ICOs, promising to create regulatory frameworks that would nurture the developing market.
80-year-old regulation not applicable
While the SEC and CFTC are actively seeking to foster cryptocurrencies and ICOs, there is one glaring problem.
Regulations governing securities in America have been around for a long time, and many of these stocks and bonds apply to vastly different businesses. This is where things can get slightly tricky.
SEC regulations are set out in the Securities Act of 1933, as noted by SEC chairman Jay Clayton in his testimony in February, so we are working off frameworks established over 80 years ago.
Many ICOs have vastly different business plans and solutions, using distributed ledger technology. While the tokens they use to power their platforms and businesses may be classed as securities by current laws - it’s fair to say that they need new, informed regulations that take into account different business plans.
US based corporate lawyer Dean Steinbeck told Cointelegraph that securities regulations need to be reworked to provide unique guidelines for ICOs.
“I do think that the Securities Act of 1933 should be amended to properly accommodate token sales and clarify when they should be considered securities offerings. The marketplace needs this as the regulatory uncertainty is paralyzing so many projects.”
Steinbeck goes on to add that the act doesn’t need to be replaced or eliminated - as it still fulfills its primary role which ensures that investors make informed investment decisions based on truthful information.
Furthermore, Steinbeck believes that 2018 should see these regulators come out with industry specific guidelines or regulations that will breathe new life into the sector. There are some pertinent questions that will distinguish ICOs and their varying business models, as posed by Steinbeck:
“Which tokens are securities? Which tokens are commodities? When does an ICO need to be registered? There are so many questions that need to be answered, even from a basic definitional perspective.”
Given the short time in which cryptocurrencies and ICOs have exploded onto the scene, the SEC has done well to work in guidelines to a cutting edge industry.
The SEC isn’t blind to this fact - and perhaps one of Clayton’s parting sentiments is pertinent to mention. Regulators are asking companies that are planning ICOs to do their due diligence, or face the consequences of infringing on the laws, however outdated they may be:
“The Commission's message to issuers and market professionals in this space was clear: those who would use distributed ledger technology to raise capital or engage in securities transactions must take appropriate steps to ensure compliance with the federal securities laws.”
ICOs need to carefully consider the characteristics of their tokens - which can fall into different categories all together.
The case of ICOs
2017 was a watershed year for cryptocurrencies as a whole - but the rising success of Bitcoin and Ethereum in particular gave rise to a plethora of ICOs. A lot of developers with a half-baked, Blockchain-based idea launched websites and actively sought funding through ICOs.
Admittedly many ICOs were launched in earnest, with sound and progressive solutions backed by Blockchain technology paving the way for a new innovations within the space.
Sadly that was intermingled with outright scams. Some ICO founders simply ran away with funds raids for tokens, while others, like the now infamous ponzi scheme Bitconnect, launched successfully but ended up failing, leading to class-action lawsuits.
It must be said that Bitconnect had also received cease and desist orders from the Texas Securities commissioner in the months leading up to its closure.
Instances like these have led to the SEC and the CFTC to take a sterner stance towards ICOs.
The bodies are concerned with the nature of ICO tokens which they effectively consider as securities - like any publicly traded stock or bond. Most ICOs offer a token in exchange for fiat currency, with investors hopeful that whatever blockchain service being developed will give them healthy returns on investment.
By the numbers
According to Clayton, over $4 bln was raised by ICOs in America in 2017 alone. According to data from ICO statistics website Coinschedule, 210 ICOs were successfully launched in 2017, while we have had 86 ICOs launched since the start of 2018.
Image source: Coinschedule
Image source: Coinschedule
Given that there have already been 81 ICOs started by March 2018 and that rate continues for the rest of the year, we could surpass the number of ICOs seen last year.
With that in mind, any fresh guidelines provided by the SEC of CFTC will have profound effects on ICOs and investors confidence.