The U.S. Securities and Exchange Commission (SEC) has warned its laws may cover The DAO, token sales and initial coin offerings (ICOs). If so, it could have far-reaching implications for blockchain companies raising funds in this manner.
It’s long been assumed the SEC held little interest in regulating cryptocurrency and the things people build on top of them. This assumption has driven much of the unbridled enthusiasm for ICOs over the past year.
However, today the agency announced an investigation into The DAO — and it seems that enthusiasm will be tempered moving forward. Why? The SEC is saying The DAO, and by extension, most ICOs, are unregistered securities.
Blockchain startups have raised huge amounts of money via token sales in 2017, with every month seeming to set a new record. Bancor raised $152 million USD value and Block.One’s EOS raised $185 million in June. Just last week, Tezos topped them both with a whopping $232 million.
The DAO Is a Case Study in Unregistered Securities Trading
While some have been saying this since the 11.5 million ether (worth $50 million USD at the time) smart contract imploded in June 2016, few judged it a serious risk until today.
However the SEC now says The DAO, and anything resembling it in the cryptocurrency space, is a security. The fact that the security is being traded on a blockchain makes no difference. One of the conclusions reached in the full investigation report makes this abundantly clear:
“DAO Tokens Are Securities: Foundational Principles of the Securities Laws Apply to Virtual Organizations or Capital Raising Entities Making Use of Distributed Ledger Technology”
The language of the document strongly implies that these findings apply to most of the ICO landscape as well, and that moving forward, ICO-style crowdfunding will need to be registered as a security to be traded in the United States — regardless of the technological backend.
A Larger Crackdown May Only Be a Matter of Time
While (at the time of writing) no charges have been filed against those involved in the creating of The DAO or Slock.it, there are dozens of ICO tokens currently being traded in the U.S. With the burden of fiduciary duty, those responsible for these tokens have been thrown into regulatory purgatory.
Every one of the top 40 Ethereum-based ERC20 token offerings has plummeted 10-25 percent as of the announcement, and there’s serious doubt as to whether the majority of their backers will continue to do business.
Several ICO campaigns have stated explicitly that U.S. residents may not participate in their crowdsales. Many companies are also registered outside the country. However, due to the nature of blockchain currencies, investors’ physical location is hard to monitor.
We’re likely seeing the end of a second massive Ethereum bubble. And with severe restrictions on its biggest use case, we may also be witness to an end of an era for Ethereum as well.
What effects will the SEC’s decision have on the crypto economy? Let’s hear your thoughts.
Image via Tyson O’Ham, Twitter