Initial Coin Offerings (ICOs) have gotten a bad reputation due to rampant fraud and the lack of transparency. Regulators, in their attempt to protect unsuspecting investors, have launched attacks to classify all cryptocurrencies, with the exception of Bitcoin and Ether, as securities and thereby subject to more stringent registration and disclosure requirments.
The SEC has clamped down hard, assessing fines and penalties, with incarceration a reality in some quarters. The resulting confusion has put a brake on ICOs in the United States and forced promoters to move offshore to more hospitable locales. U.S. Rep. Warren Davidson (R) of Ohio hopes to improve the current malaise by drafting new legislation for both cryptos and ICOs.
Davidson hosted a Congressional roundtable discussion back in September on cryptocurrency and ICO regulation. 45 representatives of major crypto companies and Wall Street firms were in attendance. Earlier in the month, a group of U.S. Congressional representatives delivered a letter to Jay Clayton, the chairman of the SEC, calling for “clearer guidelines between those digital tokens that are securities, and those that are not.” During both discussions, the need for legislative clarity was the primary concern.
Domestic legislation in every market across the globe is behind the curve when attempting to address the new digital age. Out-of-date definitions and rules designed for marketable securities are woefully inadequate when confronted with the likes of ICOs and cryptocurrencies. There are a number of international initiatives that have been announced, but initial concepts have yet to be defined. The U.S. market is but one example where local laws are confusing and where multiple agencies have made their own interpretations as to how to apply the law. Here is evidence of the problem:
- SEC: Classifies all cryptos as securities, except Bitcoin and Ether;
- CFTC: Views cryptos as “commodities”, like gold;
- FINCIN: From an AML and KYC perspective, it treats cryptos as money;
- OFAC: The enforcer of foreign sanctions “views crypto as money and blacklists wallets of sanctioned persons”;
- IRS: The domestic taxing agency treats cryptos as “property” subject to taxation of profits earned;
- State Agencies: Treatments vary across the map to allow for local regulation.
Davidson recently spoke at a Blockchain Solutions conference, where he announced his intention to submit legislation that would create a separate “asset class” for cryptocurrencies and digital assets. His bill “would prevent them from being classified as securities, but would also allow the federal government to regulate initial coin offerings more effectively.” According to his staff, a key part of the legislation would deem ICOs to be a “product”, a clever way of tiptoeing around state and federal laws that have been used to treat them as securities.
The current conundrum of confusing laws and unclear agency jurisdiction is stymieing innovation, threatening entrepreneurs with heavy fines and possible jail time, and forcing blockchain developments and their related jobs to move cross border to more favorable operating environments. Although there are several efforts to clarify existing statutes on a national and international level, something needs to happen quickly in order that existing projects move forward, unhampered by the threat of heavy fines and litigation.