My prediction on SEC outcome
My prediction on the SEC's outcome
Recently the SEC has cleared up a lot of confusion with Ethereum. A lot of crypto investors believe that Ethereum is a security because they crowdfunded. I have a bone to pick with that definition, but I'll discuss it later. I'll discuss what a security is and the different forms of securities.
The top dogs
The big coins currently are Bitcoin, Ethereum, Litecoin, and EOS. I know that Bitcoin Cash also exists but Roger Ver is an asshole and I don't feel like falling into that rabbit hole right now. Instead let's start with why Ethereum isn't a security.
A security has two different forms; equities and debt. There are hybrids of the two, but these are the most common. According to Investopedia "It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity's bond), or rights to ownership as represented by an option".
Ethereum has neither of those qualities. A stock, or share in a company, gives the investor a percent "share" of ownership of the company. Whenever you hear about a stock taker over it means that an investor has purchased enough shares of ownership to start making big decisions. Ethereum is specifically designed to NOT allow that to happen. In fact, all cryptocurrency are designed to prevent that exact event from happening. We call it 51% attack.
Ethereum did crowdfund but it doesn't have expiring debt period. After a certain period, Ether doesn't burn and pay out a yield to the investor. Instead Ethereum works as a gas. Smart contracts require this gas in order to function. The more complicated the smart contract the more gas it requires to run. This leads me to believe that Ethereum will be classified as a commodity much like actual petroleum is.
So, what about bitcoin and Litecoin? Well the issue is a currency is a monetary unit that comes from Central Banks. I know that wasn't always the case, but the FIAT system of banking is the benchmark that I will be using. Instead bitcoin is also similar to a commodity, but more like Gold. So where does Litecoin stand? More like Silver. Bitcoin = digital gold. Litecoin = digital silver.
EOS is another interesting case because it doesn't burn every time it's used like Ethereum but has smart contract feature unlike Bitcoin and Silver. You use EOS coins to stake bandwidth in the network. Having EOS coins granted you access like a subscription and the delegates vote on how to control inflation usually through the process of burning. This is similar to a deed in real estate which is an intangible asset which grants the owner special privileges.
So far we have covered Commodities and Intangible Assets but which one is a currency? Isn't that the reason we call it a crypto-currency? Surprisingly the only legitimate form of currency we have so far is Tether, but I have no doubt we will see Central Banks come out with their own tokenized FIAT.
Initial Coin Offerings
This is where we actually start to discuss securities. When a company decides to raise capital, they can either talk with private Venture Capitalists or go public. Going public gives investors shares of the company and requires a lot more overhead, but it's also a really big deal. I would argue it is viewed as a rite of passage in America. A lot of crypto companies are speculative and go public right away, and they can get away with it because there is no legal obligation for the company to respect ownership or debt unless it's written into the algorithm.
I would like to write a little side anecdote and warn companies that plan on going public. Giving your company over to investors reduces the sovereignty and control you have. A lot of times shareholders will tie your hands behind your backs when it comes to having a shareholder first approach to profit. Sometimes being profitable isn't always what's best for the company's vision, but sometimes you and your executives legally can't do anything about it. I might write another article on this issue later...
So back on track traditionally companies are regulated to follow specific rules like respecting shareholder legal right to vote, disclosing where their money is going via income statements, go through regular audits, are FDIC insured to protect investors from bankruptcy, and other legal regulations before they are allowed to be listed on on-shore major exchanges such as NASDAQ, DOW JONES, S&P 500, etc. Since crypto companies have not regulated I don't think we will see any crypto indexes, ETFs, or other derivative products meant to shield investors from market volatility. Simply this means that a majority of investors don't want to invest in crypto projects yet. Contrary to popular belief the reason crypto hasn't taken off this year isn't due to lack of scalability or mainstream adoption but rather big-time investors are simply waiting until they see the green light.
I expect that companies that are currently being developed or have already gone live will be grandfathered in with a period where they will register. There will be a new job market opening up that combines tech auditing, legal, and account counseling. Requiring a token to comply with a regulation might end up having one of the nerds go through the code and verifying that there is a mechanism for such events such as dividend payouts, financial statements, voting systems, etc. This will ultimately reduce overhead for companies and allow a direct and more efficient connection between investors and executives. I could spend all day discussing each individual nuance, but I'll just leave it abstract for now.
Utility Tokens
So, when I was at Consensus 2018 I actually watched the lecture with one of the guys from Gibraltar (I don't remember his name). What I did remember from my notes made a lot of sense. Utility tokens that are used for services such as Golem and Streamr, where the product is a service on the network, should actually go under the FTC umbrella. The reason is they are consumer products and services and less financial instruments that would be regulated by the SEC.
You could technically consider Proof of Ownership on the network such as EOS coin a product and fall under the FTC as well. This distinction will be interesting to see how the federal regulators handle it.
Another key lecture I caught the curtails of was one of the chairmen of the Federal Reserve giving a statement on the Fed's current progress in making their decision. The key thing he made clear was they are thinking about using a SSRO approach. A SSRO, aka Single Source Regulation Office, is a regulatory body responsible for a narrow focus regulatory system. In this case I can imagine we would see a federal regulatory SSRO branch become designated for crypto. It was also made clear that the SSRO would NOT be a lobbying organization nor do they handle anti-monopoly laws which is music to my ears.
My take on everything
I watched the lecture over the discussion of Bit license in New York. It was pretty interesting not knowing what Bit license was previously. More or less some guy decided to work with regulators in New York to create a "moat" which was intended to protect consumers from bad actors, but it was built a little too deep. Right after building the moat with regulators he left and decided to sell the "bridges" next. You can see why this would be pretty shady. He just secured a job stifling crypto growth in a city that needs it the most. So, it's a safe bet that the next crypto wall street won't be in New York. In fact, it was hinted that it might be in Wyoming, but I don't know if that was just used as an example.
Do I think we need all this regulation? Absolutely yes. Unbridled markets will only hurt crypto and every time we enter -60, 70, and 80% bear markets this becomes more and more clear. Adoption will come when the market becomes less volatile.
Do I think the fed is being lazy? Absolutely not. It is important to take time and make sure you get it right. I don't think they'll get it perfect right away, but it's significantly harder to fix errors than to address them right away especially when it comes to global finance.
TL;DR
I make a prediction that Ethereum is a commodity like gas, Bitcoin is a commodity like Gold, Litecoin is a commodity like silver, EOS is a intangible asset and/or product, ICO's are securities unless they are utility in which they will be viewed as commercial products which the FTC will handle.
A bunch of nerds in suits will write legal codes into documents, Roger Ver is still an asshole, and a lot of people on /r/Bitcoin will be pissed off because they are idiots.
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