A federal judge ruled that U.S. securities laws may cover an initial coin offering (Sept 11th), potentially giving securities regulators the legal purview to regulate the large initial coin offering market. Coinschedule.com estimates that more than $18 billion has been raised via ICOs so far in 2018, a figure that more than triples the $5.6 billion raised in ICOs over the entire year of 2017. The case dealt with a man charged with promoting digital currencies backed by investments in real estate and diamonds. According to Bloomberg, “U.S. District Judge Raymond Dearie in Brooklyn, New York, said on Tuesday that the government can proceed with a case alleging that an initial coin offering is a security for purposes of federal criminal law.” While the case is interesting given that it is linked to the fundraising mechanism of an ICO, the sale conducted in this scenario clearly resembles a security given that the tokens being sold represent a claim on physical assets (real estate and diamonds in this case) rather than a sale of tokens that provide “utility” in a network. This second category of “utility tokens” that do not represent a claim on assets or cash flows from a business is a much more interesting scenario that implicates large existing cryptocurrencies, like Ethereum. Earlier this year in June, SEC Director of Corporate Finance William Hinman stated that he did not believe that Ethereum should be treated as a security. Additionally, he suggested that an asset could be born via an ICO process and transition from being a security to not be a security. Future editions of this series will provide updates on the case and implications for the ecosystem.
