Regulators Characterize An I.C.O. As A Security & Potential vehicle for Fundraising Fraud

Consumer Protection Is Not The End Of A Decentralized Market

On July 25, 2017, the United States Securities Exchange Commission issued their report on DOA tokens, determining that they fall into the category of a security.

The Commission applied existing U.S. federal securities laws to this new paradigm...The Commission stressed that those who offer and sell securities in the U.S. are required to comply with federal securities laws, regardless of whether those securities are purchased with virtual currencies or distributed with blockchain technology.

SEC Bulletin

In the SEC website publication, the regulator went as far as creating a list of basic concepts that every novice investor should make themselves aware of. The determination itself is not surprising and necessary to protect individual investors. Not Long after the SEC issued the bulletin, the federal Canadian Securities Administrators (CSA) came to the same determination in a note to their staff.

...we have in many instances found that the coins/tokens in question constitute securities for the purposes of securities laws, including because they are investment contracts. In arriving at this conclusion, we have considered the relevant case law, which requires an assessment of the economic realities of a transaction and a purposive interpretation with the objective of investor protection in mind.

CSA Staff Notice

Regulatory guidance didn't stop there. As part of a crackdown on illegal fund raising, Chinese regulators include "virtual currencies" in their draft legislation as one of many potential vehicles for fund raising fraud. When the legislation is implemented, an I.C.O. may be investigated for fraud if there is evidence to do so, as it will be treated the same as the fifteen other items listed.

Comparing Chinese regulatory definitions to Western regulatory statements, virtual currencies, and cryptographic assets will be formally characterized as a security under federal securities law in these major nations.

Action being taken by these institutions is a legal acknowledgment of the new paradigm and the need to ensure that illegal behaviour is not happening. Congress has even motioned that they must stand out of the way but indicated the need for certain standards for I.C.O. and crypto currencies to exist. As investors, we all should have certain standards for what we choose to use as investment vehicles.

Ponzi Schemes and Pyramid Schemes

In a perpetual fashion ponzi schemes are a fraudulent way to create revenue for a central body or to pay off old investors or creditors by onboarding new investors. In order to pay off the new investors, operators must continue to find newer investors. In some cases a ponzi scheme is born out of incompetence and desperation, we've all heard the story of the "private hedge fund" robbing investors. In other cases it is a deliberate attempt to raise monies by hoodwinking less sophisticated individuals.

Pyramid Schemes are very similar to ponzi schemes but evolve into some sort of recruitment process where revenues trickle up to the top. New investors must onboard more investors to generate revenue for themselves and up the pyramid, keeping the scheme going.

Regulators Provide Consumer Protection

Contrary to a lot of the rhetoric spouted by crypto currency aficianados, regulators aren't trying to end the decentralized networks and value transference vehicles. They are trying to protect you, from yourself; that is their mandate.

The SEC doesn't manage individual tax law, the CSA isn't responsible for auditing individual investors. Their purpose is to make sure every financial instrument and wealth vehicle meets a certain standard to prevent fraud from occuring and unrecoverable losses to individuals. It's consumer protection. It's the system working.

Regulation and consumer protection lead to mass adoption as public awareness spreads further and individuals will feel safer putting some capital to work in this new paradigm. Of Course all investments carry risk, even government bonds, but illegal activity can hinder the growth and adoption of not just virtual currencies, but block chain itself. As the SEC put it, if it's too good to be true, it probably is.

What About Today

Like all things investment and money, we have our ups and downs. Volatility should be expected and you can bet traders love it. There is of course a lot of potential for regulatory news to impact markets negatively or postively in the immediate term. Investors may seek to protect themselves by purchasing only high market cap virtual currencies or diversifying portfolios as the landscape continues to evolve.

Goldman Sachs Investment Bank recently recieved patent approval for SETLcoin. Not far behind Goldman sachs, maybe even ahead, Bank of America Corp. is known to have at least 30 block chain and virutal currency patents. Without regulations, it would be impossible for these financial giants to particpate. SETLcoin for example will be a way to purchase real world assets (stocks) using a crypto currency. Beyond this, government institutions such as the CFTC have made postive strides by granting approvals to new hedge funds including a soon to be introduced crypto derivatives market.

Regulation doesn't just benefit the public by encouraging them to adopt something while vetting for illegal activity, it allows corporations, financial institutions and governments to particpate. More money can flow freely into the crypto economy. More opportunities, more synergies, more wealth, more social advancement.

Maybe Before We Worry About 'Big Brother'...

...Let's hear what 'Big Brother' has to say. Carry-on and ride the ups and downs, and there will be many, but staying the course in a highly speculative market has worked thus far. Implementing risk management best practices is the best way to shield your portfolio from more market turbulence in an already volatile industry. Evidence points to a "stand out of the way" mentality from regulators in the crypto space, and our institutions cracking down on the potential for criminal fund raising is welcomed.

It's the wild west out here, but once we get that railroad built, it will be a new revolution - we might want government to have our backs as the crypto community continues to make social and economic strides.