This blog is part of the “Crypto Compliance Corner” series from our Chief Compliance Officer, Peter Singer.
“To be, or not to be: that is the question: Whether ’tis nobler in the mind to suffer The slings and arrows of outrageous fortune, Or to take arms against a sea of troubles, And by opposing end them?”
Okay, so maybe the SEC is not quite as dramatic as the Bard, but they are, or at least were, struggling with a question that is pivotal: is virtual currency a security or not? On June 6th, the SEC Chairman said the agency would not be changing the rules of securities for cryptocurrency. What is particularly interesting is the way that the agency has decided to view all virtual currencies, calling them “replacements for sovereign currencies” like the U.S. Dollar or Euro.
But, if you are launching an Initial Coin Offering (ICO) using a token, then that IS considered a security. Why? Because the company is soliciting money from investors in exchange for a commodity (the token) with the expectation of future earnings from the increase in value of that token.
What’s the difference between an ICO token and a virtual currency like Bitcoin? A virtual currency is essentially a “currency” only used for payments on a blockchain. A token is representative of something on its own blockchain, like a reward point stored on a loyalty card for a grocery store or a token at an arcade that has “no cash value” but represents the ability to have one play on any machine there (except for really popular games where you have to put in two tokens to play — looking at you every arcade from my childhood).
Why is the SEC’s opinion relevant to anyone other than compliance-minded folks? Because, as a recent story in Forbes stated, 30% of millennials would instead invest in cryptocurrency than stocks. What does this mean? It means that you, dear reader, need to be extra vigilant with whom you are dealing if you decide to buy or use cryptocurrency because the SEC is only going to regulate ICOs, not companies. Check out this article from a really reliable source for a couple of tips on how to avoid scam artists.
Don’t worry though — the European Parliament just enacted the 5th Anti-Money Laundering Directive that requires virtual currency companies and wallet custodians to follow the same rules that licensed money transmitters (like Coinme) in the U.S. have to follow. How is that going to make things safer for you? Tune in next time. From my corner to yours — thanks for stopping by.