Regulations pertaining to cryptocurrencies and initial coin offerings (ICOs) have significantly evolved in the past year. Regulators have taken a more hands on approach to not only protecting investors, but also creating more concise and uniform rules governing cryptocurrencies. Companies are continuing to test borders and navigate these untested waters, and regulators, such as the U.S. Securities and Exchange Commission, have been tailoring their decisions to not inhibit the growth of the fintech industry. Law360 reports that “[w]hile the regulatory rulebook is still being written and many legal questions pertaining to cryptocurrency don’t invite one-size-fits-all answers,” it has become apparent that the “SEC has sent consistent signals over the past 12 months” to different ICO applicants.[1]

ICOs are an effective tool to raise funds and to create new virtual currencies. ICOs have raised over $6 billion in the first quarter of 2018,[2] and $13.7 billion worldwide through May.[3] Lawyer’s and fintech companies have been thankful for the SEC’s recent announcement that clarified certain aspects of ICOs and cryptocurrencies. In June, William Hinman, the SEC Director of Corporation Finance, discussed what falls into the ambit of securities transactions and when they must meet the SEC’s disclosure requirements. Hinman explained “If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.”[4] This means that assets that do not fall within the scope of investment contracts, should not be treated as securities. Hinman concluded that in light of this, Bitcoin and Ether (the token provided by Ethereum) being offered and sold on their decentralized platforms are not securities. However, if these tokens were “in a fund or trust and sell interests, it would create a new security.”[5] This more comprehensive understanding of cryptocurrencies may have a significant impact on the way the SEC treats future ICOs and cryptocurrencies generally.

Now the fintech industry is waiting for more concrete guidelines to regulate their practices and platforms. Despite Hinman’s clarification, there is still a high threshold for companies to pass in order for their cryptocurrencies to fall outside the scope of securities regulations. Trading platforms and venues are still advised to register with the SEC, unless they can claim an exemption. “Assuming more companies seek to sell security tokens, questions remain as to whether secondary trading markets will develop.”[6] Although regulating secondary markets for virtual currencies is far into the future, it would establish a clear framework for the fintech industry.

[1] Zanki, T. (July 6, 2018) “SEC Moving Toward Sharper Clarity on Crypto Regs, ICOs.” Law360. Available at https://www.law360.com/securities/articles/1060154/sec-moving-toward-sharper-clarity-on-crypto-regs-icos. Accessed on July 13, 2018.

[2] The Economist. (April 26, 2018) “How to Regulate Crypto.” The Economist Print Edition. Available at: https://www.economist.com/news/leaders/21741143-three-questions-overseers-digital-assets-how-regulate-crypto. Accessed on May 4, 2018.

[3] Op. Cit. n1.

[4] Hinman, W. (June 14, 2018) “Digital Asset Transactions: When Howey Met Gary (Plastic).” U.S. Securities and Exchange Commission. Available at: https://www.sec.gov/news/speech/speech-hinman-061418. Accessed on June 15, 2018.; An “investment contract” is defined in the case SEC v. W.J. Howey, 328 U.S. 292 (1946). The Test “requires an investment of money in a common enterprise with an exception of profit derived from the efforts of others.”

[5] Ib.

[6] Op. Cit. n1.