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The Battle Over ICO Regulation Has Just Begun
FinTech, Blockchain, Financial Services
In a speech he delivered last December, U.S. Securities and Exchange Commissioner Jay Clayton somewhat surprisingly acknowledged that he believed initial coin offerings (ICOs) are potentially “effective ways for entrepreneurs and others to raise capital.”
It became a little less surprising, however, when Clayton added one big caveat: “The novel technological nature of an ICO does not change the fundamental point that, when a security is being offered, our securities laws must be followed,” Clayton said.
This is, after all, an agency that has sent warnings to investors about the inherent risks of ICOs and cryptocurrency investment funds. There have also been charges against ICOS for defrauding or misleading investors, and the pushback against celebrity endorsed coin offerings.
Speaking at a Senate hearing on cryptocurrencies earlier this year, Clayton noted that there are “a lot of smart people who think there is something to the value of the cryptocurrency and the international exchange,” but added that he’s “not seeing those benefits manifesting themselves in the marketplace yet.”
However, Clayton’s “fundamental point” about securities laws is now expected to be challenged in court, which could have significant ramifications on the future of both ICOs and the entire cryptocurrency market. As first reported by the Wall Street Journal, the Ontario, Canada-based social media company Kik has signaled that it will soon wage a legal challenge against the SEC’s ability to regulate ICOs as securities.
Ted Livingston, chief founder and chief executive officer of the Waterloo, Ontario-based startup (pictured), tells the Journal that the company “plans to fight an expected enforcement action from the Securities and Exchange Commission” over Kik’s blockbuster ICO in 2017 that raised $100 million in “kin,” the startup’s own ethereum token. The fundraising was described by TechCrunch as the “highest-profile” ICO undertaken thus far by a consumer internet company.
Per the Journal:
A court battle with Kik could help determine the scope of the SEC’s authority to tame the unruly ICO market, which has been used by legitimate startups and scammers alike to raise more than $20 billion since 2014. The SEC has taken aim at several token issuers, but a judge in a civil case has yet to rule on the central question of whether ICOs should be considered securities offerings. A loss for the agency could curtail its efforts to root out fraudulent offerings and give rise to a new crop of ICO scams.
Although “its efforts to root out fraudulent offerings” has been central to Clayton and the SEC’s efforts with ICOs, it should be noted that Kik is not being accused of fraud. Instead, the agency’s “enforcement division believes Kik failed to register the sale with the SEC and thus didn’t give investors the proper information,” as the Journal notes.
For their part, Livingston and Kik maintain they never marketed kin as a security, but rather as a “utility token” for developers. It’s also seen as “the foundation of a new ecosystem of apps and service, of which Kik would be one part,” according to the Journal.
Kik’s expected legal challenge to the SEC’s authority signals that we are just beginning the battle over how regulators will enforce ICOs, cryptocurrency and other blockchain-powered innovations – not just in the United States, but across the globe. We have already seen China ramping up regulations on cryptocurrencies and ICOs (but maintaining support for blockchain technology development), while Switzerland – which has a well-established reputation as one of leading crypto hubs in the world – recently eased cryptocurrency regulations following blowback from its tightening rules on ICOs.
Kik’s legal challenge might turn out to be an outlier to how the real battle over crypto regulations plays out. Instead of the courts, the real changes will likely happen at the regulatory and legislative levels.
It is also something that could take years to figure out on a global scale, a succession of rulings that could add more confusion to the crypto markets before there is clarity. But you have to start somewhere.