SEC Rules That Blockchain Tokens Are Regulated Securities

The Securities and Exchange Commission (SEC) has ruled that blockchain tokens sold through token sales are to be classified as securities, a ruling that was anticipated and that will have a powerful impact on projects looking to fundraise from U.S. investors. The ruling follows an investigation of The DAO, which raised a record-breaking ICO (Initial Coin Offering) last May and then lost one-third of it in a hack. As a result, part of the Ethereum community executed a rollback transaction of the DAO fundraising; The DAO has since been delisted.

“SEC investigators ruled that tokens sold by The DAO were securities and so subject to federal securities laws,” reports VentureBeat. “The ruling will have a cascading effect on all Initial Coin Offerings (ICOs) or token sales.”

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With regard to ICOs in the U.S. or from U.S.-based investors, the SEC now warns that, “federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.”

The SEC will not bring charges against those involved in The DAO, but “the Wild West days of the crypto world are over.” On the upside, the ruling will make it more difficult for scam artists to “just spin up an ICO and abscond with money,” and lawyers, traditional financial advisors and money managers can get involved in ICO investments “without having to worry about the SEC’s position.”

But the downside is that, “we are likely to see more and more blockchain-based innovation move to other locations such as Zug, Switzerland … Dubai, and Singapore,” which “will hurt the development of U.S.-based blockchain talent and … likely slow the pace of innovation.”

However, concludes VentureBeat, “at the end of the day, decentralized systems are a net positive … [and] the SEC ruling could be a net positive,” moving the sector into an “implementation phase” that will help build “the decentralized applications of the next Internet that give people more privacy, more security, more flexibility and reward them for the value they create.”