Defining Cryptocurrencies – The Debate Continues
The SEC will continue to treat security-like tokens as securities, said Jay Clayton, Chairman of the U.S. Securities and Exchange Commission (SEC). In an interview with CNBC on Wednesday, Clayton said, “If you want to do any IPO with a token, come see us.”
Digital Token as a Security
In the interview, Clayton went on to define a security-like token by stating, “A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say ‘you can get a return’ that is a security and we regulate that.” The SEC regulates the offering and trading of the security, he added.
These days, digital tokens are getting linked to all types of industries, from health to gaming. But, as is evident from the ICOs in the financial services market, this integration is not without its challenges. The question in the financial services industry seems to be: when does a digital asset become a security?
Debate about XRP
There is an ongoing debate about how to define some well-established cryptocurrencies, such as XRP. XRP is currently the third largest cryptocurrency by market cap, according to CoinMarketCap. Ripple, the maker of XRP, uses the term digital asset for XRP instead of currency. Some facts that go against XRP in the debate is that it’s a centralized currency that was initially offered on bitcoin forums and not like other ICOs.
Decentralization is a key attribute of cryptocurrencies in the eyes of many experts. The centralization of XRP is highlighted by the following facts: Ripple decides which nodes can validate transactions and the algorithm behind the digital asset is geared towards trusting Ripple nodes over other nodes. The company does, however, have plans to decentralize XRP over time.
The Howey Test
The “Howey Test” is used to determine if an asset qualifies as a security. According to the Securities Act of 1933 and the Securities Exchange Act of 1934, “investment contracts” are securities. With the increase in interest in crypto investments, the SEC has ramped up its efforts to define cryptocurrencies.
In relation to cryptocurrencies, the Howey test’s applications are whether or not the investor is speculating, and in the case of a speculative investment, whether or not the return on investment is entirely dependent on a third party. If SEC classifies a cryptocurrency token as a security, it can determine the legality of the sale of that token to U.S. investors.
Is the ICO Market Growing at an Unsustainable Rate? Yes, Say Experts
The ICO market’s bubble will burst soon, according to Ella Zhang, Head of Binance Labs. Talking to Boolmberg, Zhang said, “We still see a lot of hype in the market, valuations are high and unreasonable. We really think if the bubble bursts, it’s a good thing for the industry.”
Binance has recently launched a $1 billion venture fund that is headed by Zhang. The company, which has the world’s largest cryptocurrency exchange by volume, held its own ICO in 2017. Moreover, the CEO of Binanace, Changpeng Zhao, considers the ICO model a better way of raising money compared to traditional fundraising methods.
Despite considering the ICO market’s growth unsustainable, Zhang is not averse to investing in the market. According to her, Binance Labs has already invested in four projects and they don’t have any issues in investing in both companies and tokens.
Many ICOs have managed to raise substantial amounts in a relatively short amount of time. According to CCN, Block.one, the company behind EOS, has raised over $4 BN in an ICO that lasted from June 26, 2017, to the June 1, 2018. The company managed to get a $185 MN investment for EOS in the initial crowdsale that lasted five days.
The EOS ICO has been by far the most popular ICO among investors, but there are other projects that have raised substantial capital as well. In a private sale, Telegram raised $1.7 BN from 200 investors for its encrypted chat app.
Some of the new ICOs that have attracted considerable interest include the cross-ledger agnostic protocol OneLedger (OLT) and the decentralized protocol for professionals Profede (PATO). The OLT ICO will be arranged between June 15 and July 15, 2018. The project has a goal of $15 M, and it has already raised $10 M from investors. PATO’s ICO date is June 1 to September 15, 2018, and it has already raised over $8.7 M of its $20 M target.
Naturally, the current interest in the crypto space has also attracted opportunists trying to take advantage of people by creating fake projects. To counter fraud in the cryptocurrency space, Binance intends to develop the “Community Governance Initiatives” (CGI) program, says Zhang. The program will help the company identify and delist scammers and others who don’t deliver what they claim to deliver.
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