Ever since ethereum’s smart contract platform allowed tokens to be easily created, I have heard one subject come up repeatedly: “I don’t want our token to be considered a security”. Initially I completely agreed with this sentiment. Who wants to deal with more paperwork, regulation, laws and costs? This is why we are creating cryptocurrencies in the first place to avoid this kind of censorship and control. As I am watching this space evolve and mature, my opinion on this has changed and let me explain why.
First let me preface by saying I do have experience dealing with the securities regulatory environment in the United States. Specifically the SEC, Finra and the NMLS. My previous work has taken me to many different corners of the financial world and I have learned a lot about operating in a highly regulated industry. One of the biggest takeaways from dealing with them is that if you do nothing wrong and don’t break the rules, these agencies are not a major force in your life. There is definitely some work that needs to be done upfront as far as documentation, registration, fees and licensing tests but these should not be seen as road blocks and change the way you structure your whole company and token. Many companies over the last 80 years have completed these tasks in order to sell securities to the public, why can’t we? The amount of sheer intelligence and organic growth I have seen in the crypto space (especially in EOS community) tells me that we are up to the challenge. But before that, let’s take a look at the SEC that so many crypto startups are deathly afraid of.
The SEC was created in 1933 as a result of millions of people getting badly burned in the stock market. In the roaring 1920’s, people acted very similar to 2017 and FOMO’d into the stock market only for it to crash and cause the great depression. Here is some info from the SEC’s website describing why they were created and what their mission is:
So to summarize their reason for existence, they want to simply make sure disclosures and information is reaching the investing public and that there is no fraud happening. If I am creating an honest and legitimate business that uses crypto technology, I don’t see a problem with abiding by these 2 major rules if I want access to the general public as a source of funding.
Don’t get me wrong, I am by no means a fan of gov’t regulation or adding control to the crypto space. Many projects should not be categorized as a security token. BTC, LTC, BCH, XMR are going to be considered currencies, not securities. ETH, EOS, NEO, IOTA are going to be considered platforms, not securities. True utility tokens such as BAT, IQ, and even TRYBE tokens should be considered utility tokens and not deal with the SEC. But what if I want to create a smart contract that pays dividends to the token holders based on the revenue or profit of the business? This will be considered a security if the token is available to the general public. And I say that is OK, we shouldn’t let the possible regulations scare you away from innovating and creating. Everyone is trying to call their token a utility when it is clear that the intention is to drive the price higher in the open market. We shouldn’t be afraid of regulation if we want to compete with the big corporations and really start disrupting what needs to be disrupted.
The cool thing about this is that the people on the other side of this topic, the SEC employees and directors, are trying to extend an olive branch to us to start building fair and useable frameworks. They want communication so that they can start learning more about the technology themselves. I believe this a necessary step for achieving mass adoption. We can’t stay on the dark web forever and we shouldn’t sell our souls to the system. I believe there is a balance that can be achieved that will allow the honest crypto projects to conduct their business in the open, without fear.
Both SEC commissioner Hester M. Pierce and CFTC chairman Christoper Giancarlo have been intelligent, open-minded and fair in all communications regarding crypto’s. They have been surprising positive with cryptos and that should be acknowledged. The governor of Colorado has created a crypto council with industry leaders like Erik Voorhees giving us a voice in state law. They are trying to evolve with us and I think that is great for both parties. Remember, all the SEC was created to do by the US citizens is make sure investors have enough information and to fight fraud. If they are overstepping these objectives in any way, that is a different conversation entirely, but if they want to work together with legitimate projects we should be open-minded as well. Remember we are essentially asking for the keys to the kingdom: if tokenized crypto projects can become legal securities, there is no reason we can’t be put into an ETF or mutual fund. If we can have ETF’s, we have access to all of those investors that can’t figure out the complicated technical world of crypto. Think about the amount of IRA’s and 401k’s that have brokerage accounts that are just waiting to diversify into crypto. It will be a flood of capital, and they know it.
We have a ways to go on this subject but I do know that it can’t be ignored. I would love to hear any feedback or opinions on this subject from any users of crypto, founders or even regulators.