SEC: DAO Tokens are Securities, Subject to Federal Regulations
In a move that brings cryptocurrencies one step closer to official regulation, the U.S. Securities and Exchange Commission has declared DAO Tokens to be securities, and thus subject to federal securities laws. The SEC has also stated that issuers of ICOs must register and provide necessary disclosures. This declaration is in response to an investigation into last year’s sale of DAO Tokens, which raised $150 million in Ether from 11,000 investors.
The SEC has concluded that, as an unregistered sale of securities, the DAO Token sale violated federal law. However, no legal action will be taken. Rather, this ruling is designed to establish guidelines for for future initial coin offerings. SEC Chairman Jay Clayton stressed the importance of protecting consumers, stating:
“Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today’s Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with securities laws.”
As cryptocurrencies become more integrated into mainstream financial markets, pressure has been mounting on the SEC to regulate them. This current action is welcomed by traditional financial institutions seeking to add cryptos to their business models. Cryptocurrency hedge funds, ETFs, and other investment vehicles have emerged this year, and many more are likely to follow. In fact, the SEC began the DAO token investigation in response to a petition filed by a New York-based financial broker, Ouisa Capital.
Despite this ruling, the legal and regulatory status of cryptocurrencies is still far from resolved. Many cryptos, such as Ethereum, have uses that are not financial in nature, and thus should fall outside the purview of financial regulators. Likewise, most cryptocurrencies are decentralized by design, and using them cannot be prevented or managed by a single state entity. Even the SEC acknowledges that not all ICOs fit its definition of a security, and that each would depend on “facts and circumstances, including the economic realities of the transaction.”
This move by the SEC comes as other nations are taking similar steps to legally define cryptos. Japan now recognizes Bitcoin as a source of payment. China, India, and Russia are all moving very quickly toward defining and regulating blockchain technology, and the European Parliament is debating a number of new regulations. It can be assumed that, as adoption of cryptocurrencies continues unabated, international agreements regarding cryptos will soon be adopted.
This SEC ruling will no doubt have an impact on the value, and success, of future ICOs. It will also affect which cryptocurrencies are embraced by the public. Although SEC compliance is by no means a requirement for an ICO, without it, investors will likely be hard to find, as it could prompt legal action against any American parties involved. Also, not all cryptocurrency advocates are pleased with this current move, as many consider independence from government oversight to be a core element of the cryptocurrency movement.
The SEC has also declared that exchanges that trade ICO tokens are subject to oversight, as are all other participants involved in the sale. Such a broad definition will certainly require clarification. It is likely that the SEC will soon issue further guidelines to help navigate the rapidly developing ICO market.