SEC hasn’t quashed blockchain innovation. Let’s keep it that way
In a recent report, the Securities and Exchange Commission stated unequivocally that blockchain-powered digital tokens can be securities. This finding could have serious consequences for the future of blockchain technology.
Digital tokens, built on the kind of open blockchain technology pioneered by bitcoin and ethereum, are sometimes used as naked instruments for sharing profits among investors in a common enterprise. Other tokens, however, are actual pieces of future network technology. Their creation and sale should be at least as free and clear from burdensome securities regulation as are crowdfunds on Kickstarter or web domain registrations.
Over the past year, developers have raised well over $1 billion by building and selling tokens to hordes of enthusiastic online purchasers. Today’s version of a dot-com-bubble maverick is a blockchain startup proudly announcing its upcoming “initial coin offering,” or ICO.
The SEC report doesn’t abolish ICOs. Instead, it describes how a particular now-defunct token effort from last summer, known as “the DAO,” was a security (that therefore should have fallen under the guise of securities regulation). It does so by employing the facts and circumstances of SEC v. W.J. Howey Co., a seminal Supreme Court case that is often used to determine if and when federal securities laws apply.
Using this test, the SEC has now begun cleaving the ICO world in half: Some tokens are going to be regulated as securities while others may not. Where the SEC chooses to draw that line over the next few years will mean the difference between offering reasonably calibrated investor protection, on the one hand, and crushing a nascent movement to democratically fund and build the core infrastructure of future internet technologies, on the other.