SEC's "ICOs Are Securities" Ruling Proves Bitcoin Has Staying Power

he SEC shook the blockchain community last week when it issued a report ruling that the $50 million worth of tokens that were stolen last summer as part of a hack on the DAO were securities and should’ve been registered with the SEC. The DAO was a decentralized platform for investing in Ethereum-focused startups that was essentially an early version of the now popular Initial Coin Offerings. The report will likely slow the pace of new ICOs, as fledging company’s comprising a couple of ambitious engineers figure out how, exactly, to go about registering their projects.

But CoinDesk analyst Noelle Acheson, in a report for the site’s premium subscribers, argued that the ruling’s benefits outweigh the short-term inconvenience that these startups will likely experience as they rush to recruit compliance specialists to vet their offerings and communicate with the SEC.

By declaring that ICOs should be regulated like securities, the SEC is admitting that they are, indeed, securities. This is a landmark ruling. Since the CFTC first declared bitcoin to be a commodity in 2015, regulators have provided precious few updates to help move the digital currency further down the path of legitimacy. Earlier this summer, the Delaware legislature passed a law officially legalizing the use of blockchain technology in the trading of stocks. Later, the agency issued a registration order to startup called LedgerX, granting it status as an official CFTC Swap Execution Facility, legalizing bitcoin options trading the process.

Capital raising through blockchain requires compliance with federal securities laws https://t.co/IjOxjoVdfK

— SEC Enforcement (@SEC_Enforcement) July 25, 2017

As Acheson writes, “the short-term impact on digital token issuance, assuming their assuming one, will probably instigate some sharp moves..."

“But there"s something else going on here that will end up boosting blockchain development and injecting a welcome dose of innovation into securities issuance and regulation.

It"s not so much that the SEC has officially determined that blockchain assets can be considered securities and therefore have to comply with the law. It"s that blockchain assets can be considered securities at all.”

Acheson’s analysis echoes our commentary featured in a report on the initial ruling. As we said, while the SEC"s intention to regulate ICOs will probably have an initial chilling effect on the market. Not only is it a blessing in disguise as it will not only validate the blockchain capital-raising mechanism, allowing the entrance of major banks to use it as a fintech alternative to IPOs, but it will also help weed the proliferation of fraudulent schemes that presently are thriving in the grey area of legitimacy.

By choosing the regulate ICOs, the SEC is opening the door for the coins to eventually be used as collateral for capital markets transactions, a crucial step toward the crypto community’s goal of supplanting fiat currencies. Finally, we posited that the Federal government’s oversight will force companies to tighten cybersecurity controls after hackers tallied $40 million in ill-gotten gains during a series of attacks on ICOs this year.

“And if blockchain assets can be considered securities, securities can be transformed into blockchain assets.

This takes the Delaware achievement (changing the law to allow registered businesses to issue securities on a blockchain) and magnifies it, sending a signal to all states that a federal regulator is willing to broaden its definition of acceptable transmission methods.”

The SEC"s decision is an important step in a competition to determine which global regulators are leading the process of legitimizing blockchain-based asset and incorporating them into the existing global financial framework is intensifying. Last month, regulators in Switzerland granted a local bank permission to trade cryptocurrencies and incorporate them into the portfolios of its private banking market. As we reported at the time, the decision placed Switzerland at the forefront of the rapidly universe of blockchain finance, and will likely encourage other global regulators, including the SEC and the Fed, to follow suit.

Acheson posited that the agency’s most recent bitcoin-elated ruling will help repair the damage inflicted on the SEC’s credibility, at least in the eyes of the blockchain community, after it rejected NYSE Arca’s request for a rule change that would’ve used opened the door for the first bitcoin-focused ETF.

“Entrepreneurs and developers will have more confidence in their project"s outlook knowing that it is compliant in multiple jurisdictions, with access to a broader pool of investors.
In addition, it sends a message to other jurisdictions that blockchain-based assets are not going away. Securities regulators around the world have been intensifying their efforts to catch up with the innovations while fulfilling their mandate of protecting investors. Guidance from the SEC is likely to help.”

Coincidentally, the SEC ruling has arrived a crucial time for bitcoin and the broader crypto universe, as a group of developers prepares to release an alternative to SegWit, potentially triggering a fork in the bitcoin blockchain that could render some coins worthless. Despite this, bitcoin is higher (up 5%) and the rest of the major virtual currencies lower (down 4%).

Support for Segwit has climbed above the threshold for adoption, which presently stands at 80% of the network’s hashing rate, according to Blockchain.info. This is an incredibly bullish indicator: As we’ve noted, the post-segwit rally could swiftly carry the digital currency above $3,000 a coin to a fresh all-time high.

As Some Firms Defy SEC, Overstock Is Set To Cash In On "Wild West" ICOs

The Securities and Exchange Commission roiled the blockchain industry last week when it announced that so-called Initial Coin Offerings are considered securities offerings. While some firms are embracing a strategy of open defiance, vowing to push ahead with their planned ICOs without registering them, at least one former innovator in the blockchain arena sees the new rulings as a boon for its nascent cryptoasset trading platform, according to CoinDesk.

Overstock.com, one of the first major US companies to embrace blockchain technology, believes the regulations could drive business to its cryptoasset trading platform known as T-0. Overstock cemented its status as a blockchain innovator back in December 2015 when it raised $2 million by offering a small tranche of Overstock corporate bonds on its platform. The offering, which received approval from regulators, created the first blockchain-based financial securities to trade in the US.

Overstock CEO Patrick Byrne

Since then, the company has been quietly building out its platform while waiting for US regulators to create a framework for legally offering and trading blockchain securities. And now the day it has long been waiting for has finally arrived, according to CoinDesk.

“…earlier this week, tØ got the news it had been waiting for when the SEC finally published the results of a landmark report in which it clearly laid out its rationale for why some tokens are still securities.

Moreover, the report clarified that, once a token issued in an ICO has been deemed a security, only national securities exchanges like Nasdaq and some alternative trading systems (ATSs) are permitted to be involved in the trading.”

Overstock.com started building its T-0 blockchain-based trading platform in the spring of 2015, when it purchased a stake in an alternative trading system. Now, the company believes its system is ready for the mass market, and hopes to receive permission from the SEC to traffic in ICOs in the coming months.

“Moreover, the report clarified that, once a token issued in an ICO has been deemed a security, only national securities exchanges like Nasdaq and some alternative trading systems (ATSs) are permitted to be involved in the trading.”    

According to CoinDesk, Overstock CEO Patrick Byrne has long hoped to build a platform that would allow trading in stocks and bonds backed by the blockchain. The platform’s name, T-0, is derived from Byrne’s claim that blockchain-backed transactions are inherently superior to the current system because, in theory, these trades will settle instantly, instead of taking up to three days to clear.

However, many competitors, including some of the world’s largest financial institutions, are quickly catching. Earlier this month, Goldman Sachs was awarded a patent for its own crypto trading system called “SETLCoin.”  

Those who are only now becoming acquainted with Byrne’s story might wonder: What inspired a guy who built a billion-dollar business selling furniture and other household goods to try and revolutionize how financial securities are traded?

Byrne was initially inspired to try and disrupt the world of high finance after Overstock was nearly destroyed by “naked” short sellers, or speculators who sell a company’s shares short without first procuring the securities. The incident inspired Byrne to use the blockchain to cut out everyone who stood in the way of buyers and sellers, as CoinDesk explains.
Still, the question of whether it’s legal to trade blockchain-based stocks and bonds remains murky. However, there’s been at least one important breakthrough recently. Last month, the Delaware legislature passed a landmark amendment that opened the door to blockchain-backed stock trading on a massive scale – a decision that could significantly impact Overstock’s business.

“One possible explanation for the relatively few compliant blockchain capital raises is uncertainty about the legality of recording stock ownership on a distributed ledger, according to Andrea Tinianow, founder and director of the state-run Delaware Blockchain Initiative.

Using technology that tØ"s parent company invested in last week, made by New York-based Symbiont, Delaware has just signed into law a series of amendments that Tinianow has said will remove much of that uncertainly for firms incorporated in her state.

"We"ve got the regulatory framework for blockchain shares," said Tinianow. "Now the SEC is coming in with federal guidance and it’s a natural fit."

In another major regulatory accomplishment, the Commodity Futures Trading Commission recently approved the creation of the first clearinghouse for cryptocurrency options, a decision that could entice sophisticated investors like hedge funds and CTAs to increase their exposure to bitcoin, as we reported earlier this month.

“US regulators aren’t yet comfortable with bitcoin ETFs (although a quad-levered S&P ETF is just fine for mom and pop), but apparently options and swaps are another story. This week, the CFTC took a bold step forward in terms of granting institutional investors access to the bitcoin market, approving the creation of the first SEF or Swap Execution Facility. Previously, traders who wished to place bets in bitcoin derivatives markets were forced to operate in markets that were strictly OTC. But now the agency has issued a registration order to LedgerX, granting it status with the CFTC as a Swap Execution Facility, in the process approving bitcoin options trading.”

While Overstock has a long history of working with regulators, some companies are effectively choosing to rebel against the SEC’s ruling that all ICOs marketed in the US must be registered, according to Reuters.

“Technology companies looking to raise money by issuing digital coins are moving forward with their plans despite a U.S. regulator"s decision that their offerings may be subject to tough securities laws.

On Tuesday, the SEC decided that tokens issued through the ICOs can be considered securities, meaning they would fall under laws that require disclosures and are subject to regulatory scrutiny to protect investors, unless a "valid exemption" applies.

Some industry participants and analysts had thought such a decision would have a chilling effect on the ICO market. But 20 new ICOs were announced since the SEC"s decision, with more than 120 scheduled to launch this year, according to ICO tracker tokendata.io.

Representatives of Rivetz and ICOBox, which plan to launch tokens over the next few weeks, told Reuters they are pushing through with their offerings.”

According to Reuters, ICOs have raised more than $1 billion in capital this year as companies launched more than 900 new coins.

"We were kind of annoyed when these ICOs started taking off. They weren"t getting approval, it was the Wild West. We thought long and hard about doing our own ICO ... But we held off, going down the regulatory road," T-0 President Joseph Cammarata told CoinDesk.

ICOs are similar in principal to stock offerings in that investors bid up the price of tokens associated with companies they believe will grow profits. However, the paucity of information about many of these companies – some of which have been unmitigated frauds that essentially took investors’ money and ran - makes valuing them nearly impossible.

Hackers have plagued the cryptocurrency investment community since its early days, so it’s little surprise that they’re already started looting ICOs – a security problem that could potentially drive more customers to OverStock’s platform if it can provide enhanced security. As we reported earlier this month, hackers stole $7 million in investors’ funds from CoinDash, a blockchain startup focusing on "cryptocurrency social trading and portfolio management platforms.” Bloomberg notes that hackers have stolen more than $40 million from ICOs.