The move by the SEC relates to organizations who distribute ledger or blockchain technology (sometimes called “Initial Coin Offerings” or “Token Sales”). The SEC ruling means that some of the “coins” for sale are actually classed as securities, and this means they are subject to the agency’s regulation.
The significance of this move by the SEC is that the decentralized, laissez faire state of play is over. According to Venture Beat, any blockchain company wishing to raise money via an ICO in the U.S. has now been warned 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 implications of this decision are significant and they are sending shockwaves through the digital community. ICOs are very popular at the moment and many, many small companies have raised millions of dollars by using them. Many ordinary investors also have stakes. This is in the context of an ICO working in a similar way as an initial public offering.
What is blockchain?
A blockchain refers to a distributed database used to maintain a continuously growing list of records (the ‘blocks’). Each block contains a timestamp and a link to a previous block. The function of many blockchains is to process digital currency. Perhaps the most well known was the blockchain developed by Satoshi Nakamoto, in 2008, as a core component of the digital currency bitcoin. This blockchain functions as the public ledger for all transactions using the cyrptocurrency. In other words, the technology behind bitcoin lets people who do not know or trust each other build a dependable ledger.
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Blockchains acts as open, distributed ledgers that record transactions between two parties efficiently and in a verifiable and permanent way. Blockchains are set-up to be very resistant to modification of the data.
The SEC ruling came about after the federal agency investigated the issuance of tokens connected to The DAO, which is an Ethereum-based funding vehicle. Ethereum is an open-source, public, blockchain-based distributed computing platform. The DAO was a digital decentralized autonomous organization and a form of investor-directed venture capital fund. In an act of cybercrime, in June 2016, hackers exploited a vulnerability in the DAO code to enable them to siphon off one third of The DAO’s funds to a subsidiary account.
With that particular case, the SEC said the “DAO tokens” constitute securities’ and its finding has been released “to caution the industry and market participants,” according to a report by Coin Desk. As well as its main report, the SEC has produced an investor bulletin covering initial coin offerings. The bulletin prompts a strong warning about the risks of fraud for those who opt to participate.
