This seems, to me (a layman), to indicate that most any ICO will fall under "security." Can anyone provide an example where an ICO would not be a security as defined by the Howey Test?
Pretty much, yes. Securities are defined very broadly in the US.
Why does it surprise you that these are securities? They very obviously are selling a security to investors, who are purchasing it because they expect the price to increase. Open-and-shut case.
The fact that there's crypto involved is irrelevant.
It really sounds like people are trying to pretend these laws don't apply because they disagree with the laws in question. Which is fine, but let's not pretend like there's any ambiguity here, because there's not. It's extremely clear that almost all ICOs are securities, and if you asked a lawyer I'm 100% sure that's what they would tell you.
BTW, a number of games successfully have things like this, eg. Linden dollars in Second Life, gold in WoW, or tokens in FarmVille.
That wouldn't really be an ICO, though, right? You have to be able to convert it back and forth between another currency, not just "earning" it through use of the software to be spent only there and never changing hands.
https://www.sec.gov/news/public-statement/statement-clayton-...
So now just imagine a token that has the same functionality.
You receive a token that does something useful. Do you use that token wisely? Or do you make bad business decisions?
There are tokens that people are buying to use, not just to HODL.
So now just imagine a token that has the same functionality.
You receive a token, it's made of paper like the notebook but does something useful.
Should that token, the piece of paper be regulated? Lol yes, it's now money! And all other assets or securities are regulated.
They both represent either computation-time or file-storage-and-bandwidth time.
Ethereum could easily represent time on a distributed AWS Lambda. And FileCoin can represent an AWS S3 storage.
It just so happens that they both are also cryptocoin.
It gets even uglier that the turning-like machine in Ethereum/Solidity also exists, kind of, in Bitcoin. In fact it was because it worked in Bitcoin they developed Ethereum. So technically even Bitcoin can do processing work. Makes everything a bit murkier to be honest.
These aren't new concepts. People have been trying to get around regulation for thousands of years.
Pretty much anything that can be bought and sold is an asset. Yes, that includes notebooks and paper.
If you're saying that the piece of paper represents ownership of something, then the paper is most likely a security or derivative, in which case it is already subject to regulation. A token with the same functionality as this piece of paper would be regulated, and vice versa...
Obviously, this isn't the first time we've had offerings ostensibly taking these forms. People used to buy comic books in the hopes of their appreciation. Ty sold Beanie Babies to people who were stockpiling them for eBay.
The reason Ty didn't get in trouble, but Munchee did, was that Ty was never stupid enough to record videos extolling the once-in-a-lifetime opportunity people had to 9x their investment in restaurant review coupons. Again: a very significant component of the SEC's concern is about marketing and promotion.
They are certainly speculation. But I doubt the SEC would ever claim that literal bars of gold (not notes, physical bars of gold) are securities.
Being a security does not mean it can't also be something useful; it just means that the security aspects of it are potentially subject to securities laws.
EDIT: Beanie babies aren't securities because you actually the beanie baby. However, a piece of paper entitling you to ownership of a beanie baby could be a security.
Imagine a coin securitizing Bitcoin miners ("cloud mining coin"). Yes, that's a security.
Now imagine Ethereum. It was ICO'd, talking in today's terms. Is it a security? (hint: SEC just admitted it's not)
True, but then you're limited to things which can be stored in a blockstream in the space allocated to a single coin. There aren't many useful resources that could fit into that space, even fewer that would scale.
Now imagine Ethereum. It was ICO'd, talking in today's terms. Is it a security? (hint: SEC just admitted it's not)
Unless there is something about Ethereum that I'm not aware of, it does not represent any sort of ownership interest in another asset, it is the asset.
I didn't see any admission like that. Quite the contrary. I think the statement pretty clearly places the ethereum ICO (as distinct from the functioning network after) as a security.
https://blog.ethereum.org/2014/07/22/launching-the-ether-sal...
There are a number of points in that post that scream security.
> Can anyone provide an example where an ICO would not be a security
Well, if it's purely a "utility coin", and people are buying it in order to exchange the coin for some service (like, basically, car wash tokens but on the internet), and there's not really any speculation in the secondary market, and people are buying them for their own use and not to resell or speculate on, it's probably fine. On the other hand, if the product that the coins would be used for hasn't been built yet, it's probably not fine (since you're gambling on the founders executing properly, yet have no real control over whether they do so).
...but no, I don't know of any examples that fit that criteria. ICOs don't make a lot of sense for things that aren't securities; the most common purpose (at least for the legit, non-fraudulent ones) is to obtain investment to build a product. That's obviously a security, and one of the core purposes of securities law is to protect people being asked to contribute an investment that will be used to build a product.
It's arguably easier to be in compliance in a single market of 350 million people, then in multiple markets, each governed by their own laws.
Some jurisdictions also don’t require normal stock offerings to follow rules as strict as the SEC does. It doesn’t stop the US from having many of the largest stock markets in the world, and a very high level of public participation in equity investing.
https://www.coindesk.com/cftc-no-inconsistency-sec-cryptocur...
So they can all run their scams in countries that don't care? I mean, doesn't this just show that crypto startups are all about providing services to entities that, for various reasons, do not / cannot participate in the aboveground economy?
Like, what reputable, real company would have any problem existing inside the USA's jurisdiction? You could argue drug trade, which is supposedly a "victimless crime" (note: it isn't... depending on the drug, even "non-violent" drug use can fuck over a lot of people outside just the person who choses to take said drug (eg: meth, herion, oxy, etc...)). Anything else though, it is almost certainly a scammer scamming people. Why should above ground society tolerate people wanting to run ponzi schemes, people trying to cash out crypto-ransomware revenue, or people who want to deal in murder-for-hire?
You can speculate, for example, that pirate faction battleships are about to go up in price. CCP can and does change that all the time. The investor has no insight or control over how ISK is valued.
What keeps it different and unregulated is that it's a one-way conversion. You can buy things with real cash that can be sold for in-game currency. But you cannot, in theory, sell anything inside of the game for real-world cash.
Some people do, of course, but CCP polices this very heavily to avoid exactly this kind of problem.
Virtual game currencies are not that different from Coins. But the main reason they escape scrutiny by regulatory bodies is that they are one-way conversions.
ICOs were, until very recently, one-way conversions. You buy something from someone, good for you. Once it got to a point where it was relatively easy to convert that virtual thing back into legit currency, people started paying attention.
I can't see a way that any new ICOs can dodge this aspect. But there were COs that did dodge it for a while because no one thought they could get big enough to matter.
If RMT got big enough in EvE or any other video game that offers financial incentives to win at the game (so-called pay-to-win) ever got big enough to be able to affect a currency market, they would fall into this scrutiny almost immediately, which is why gaming companies police this so hard.
There isn't really any functional difference between trading game tokens and trading blockchain coins, except that one is easily transferable to real-world currency and the other is not.
So in that very round-about way, any virtual currency that is seen by the FTC to be one-way will not pass the Howey Test. But almost all virtual game currencies can be traded in one way or another for real currency. Most of them can't be done in a large enough scale to affect real currency, so no one cares. Most in-game currencies should fail the test. But they are irrelevant, so they pass.
> The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘‘security’’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.
From The Securities Exchange Act of 1934 (N.B. IANAL).
So, will cryptocurrencies, possibly including ICOs, be exempted? Only history will tell.
This is about ICOs. IE, a tokens that are a 'FUTURE' promise for something that doesn't exist yet.
If Bitcoin was a security, the statement from the SEC head would be very different.
I agree with you, but the fact is plenty of people do. Maybe not in the corner of the world, but look broader. This also wasn't the point.
(assuming it was actually done in good faith and not discernibly a scam)