Distributed Counsel 3: The SEC Is Coming



The SEC is coming! The SEC has commenced its first enforcement actions.  Specifically, it brought an administrative action against Munchee and obtained an emergency asset freeze against Plexcoin.  Munchee has returned all funds to investors.  Plexcoin has bigger problems.

The Clayton Statement

On December 11, the SEC published a statement from Chairman Clayton on ICOs, expressing Chairman Clayton’s views on the question of cryptocurrency regulation.  The statement did not completely reject the concept of the ICO (all quotations from the statement).1   Rather, it toed the now familiar line we have come to see from regulators around the world: securities are securities no matter what you call them, tokens with true utility might not be.2  Chairman Clayton uses a book club token as an example of a token that might not be a security.3 Here is a brief rundown of the statement:


  • A pre-functional token (that is a token that cannot be “used” right away) is not necessarily a security (like the book club token).
  • The mere fact that a token has a “utility” does not render it immune from being a security.4
  • Exchanges continue to be warned.5
  • Most of the ICOs to date are securities.6
  • Bitcoin is not a security.7

So the SEC in all likelihood believes most of the recent ICOs are securities.  The exceptions are (probably) Bitcoin, Litecoin, Ethereum (which the SEC has called a currency) , the Bitcoin forks (i.e., Bitcoin Cash and others), and maybe Monero, ZCash, Dash, perhaps a few others.  

Notice that, apart from Ethereum, all of these are basically payment/currency/value apps.  Notice also GDAX and Coinbase trade a subset of the exceptions.  Other exchanges with more diverse trading pairs may be creating problems for themselves and the market by offering security-coins (assuming they lack the proper registrations).  

The dynamic between the exchanges and the regulators is made all the more delicate by the establishment of a Bitcoin futures market.  Banks and other mainstream investors now have easy, secure exposure to Bitcoin.  No more wallets and exchanges.  But what if the SEC shutters an exchange or two.  The warnings keep coming and its hard to imagine that there would not be a large market reaction.  Are the exchanges used for futures pricing now effectively immune?  The CBOE is using the Gemini Exchange Auction price (see the fact sheet).  But the forthcoming CME futures rely on data from Kraken, Bitstamp, GDAX and itBit.  Kraken (an exchange so reputable it handled the Mt. Gox claims) offers a wide variety of coin pairs on its site (including the only USD/Tether pair), and Bitstamp offers Ripple in addition to Bitcoin, Litecoin and Ethereum.  

The SEC’s approach will become a study on regulatory/prosecutorial discretion.  My own view is that the Clayton statement should be read in the same way that the Yates memo is read.  It is a guide and a warning. But remember, what Chairman Clayton, or the SEC, thinks is not determinative.  Ultimately, this a question for the courts.

In other news . . .

I did a podcast!  I want to thank Chad Main at Percipient and my co-presenter Zach Smolinski.  It was an honor and a pleasure gentlemen.  It’s under a half hour.

The market has gone absolutely bonkers.  And for my mining friends, difficulty in going up across the board.

Ethereum may fork again.  The problem this time is a hack of the Parity wallet that destroyed what was then (early November) about $150M in value.  It’s a lot more now.  Parity’s team, and especially Gavin Wood, reportedly remain close to Vitalik Buterin, the creator of Ethereum.

Next post will be about data privacy, I promise.  In the meantime, click “Get It Now” to subscribe to my newsletter in the column at right.  And thanks for reading.

  1. “I believe that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects.  However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require.”
  2. “Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.”
  3. “For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders.”
  4. “Merely calling a token a ‘utility’ token or structuring it to provide some utility does not prevent the token from being a security.”
  5. “Similarly, I also caution those who operate systems and platforms that effect or facilitate transactions in these products that they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of 1934.”
  6. “By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws.”
  7. “The CFTC has designated bitcoin as a commodity.  Fraud and manipulation involving bitcoin traded in interstate commerce are appropriately within the purview of the CFTC, as is the regulation of commodity futures tied directly to bitcoin.”

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