During 2018, the US Securities and Exchange Commission (SEC) cracked down hard on ICOs. The regulatory body charged some ICOs as unregistered securities and others as outright scams or Ponzi schemes.
Bitcoin gets the green light
The good news is that the SEC doesn’t consider Bitcoin to be a security. According to SEC Chair Jay Clayton, Bitcoin acts as a “replacement for sovereign currencies,” and therefore not a security. However, Clayton said the SEC considers all ICOs to be securities.
William Hinman, head of the Division of Corporation Finance at the SEC, also cleared Ethereum. He said that because Bitcoin and Ethereum are decentralized, they aren’t securities. Hinman might also have contradicted his boss by suggesting that some ICOs might not be securities.
According to Hinman, cryptocurrencies and ICOs are probably securities if a known individual or a group sponsors the creation and sale of the asset, then plays a significant role in its development and maintenance. Another important parameter is that third parties could reasonably expect a return on their investment. In short, whether or not an asset is a security right now depends on the “Howey Test.”
Other crypto projects feel the SEC’s wrath
Some other projects, like Basis stablecoin, received much worse news from the SEC. Basis closed down its operations and announced it would refund investors’ money because of regulatory problems. As it stands, the project will refund $133 million because it can’t create regulatory-compliant tokens.
While projects like Basis know where they sit, the fate of Ripple (XRP) remains unclear. Ripple is facing a class action lawsuit from disgruntled investors claiming XRP is unregistered security. So far, the SEC has refused to comment on the case.
The regulatory body has also set a precedent when it comes to decentralized exchanges. On November 8, 2018, the SEC charged EtherDelta boss Zachary Coburn with operating an unregistered exchange. In response to these charges, other decentralized exchanges – including ShapeShift and IDEX – have preemptively implemented KYC/AML procedures.
While the SEC is leading the charge in enforcing crypto regulations, it’s not acting alone. The American regulator has managed to rally international support for a crackdown on ICO scams, with countries such as Canada notably cooperating.