One Tiny Word Could Have A Huge Impact On The Crypto Market

One Tiny Word Could Have A Huge Impact On The Crypto Market
Jonathan Hobbs, CFA

over 1 year ago2 mins

The chief of the US Securities and Exchange Commission – one of the major US government regulators – hinted at a wave of scrutiny for a whole bunch of digital assets in an interview this week.

Gary Gensler says he thinks there are “hundreds, if not thousands” of crypto projects that should be classed as securities, which would mean they fall within the regulator’s remit. But significantly, lots of them haven’t treated themselves as such. That means they haven’t been making the right kinds of disclosures to would-be investors, and potentially makes them non-compliant.

Gensler is probably basing his definition of a security on what’s known as the Howey Test, which is a legal concept used to assess which market transactions count as “investment contracts.” That’s fairly clear-cut as far as stocks and bonds go, but not so much when it comes to crypto projects. Still, there is one big giveaway: an initial coin offering (ICOs), which involves raising millions from the public via blockchain smart contracts.

That means many tokens that had their ICOs in the boom of 2017 should probably be classed as securities. Put simply, we’re likely to see the SEC bring the hammer down on plenty more crypto projects in the next few months and years. And while Gensler hasn’t been clear about what will happen to them, we might see varying degrees of fines and prosecution depending on the severity of each infraction.

On the plus side, Gensler sees bitcoin – which never had an ICO, but grew organically without a company to raise money behind it – as a commodity rather than a security. That puts it under the purview of the Commodity Futures Trading Commission, which has different disclosure requirements to the Securities and Exchange Commission and puts the OG crypto in the clear.

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