Mounting Pressure on ICO Tokens – Is Strict Regulation Ahead?

The U.S. House of Representatives Committee on Appropriations, along with the Securities and Exchange Commission (SEC), recently held a hearing to explore increasing regulations on cryptocurrency. Chris Stewart, a Republican from Utah, characterized the regulatory efforts as part of a push to give people “the information they need to make good decisions.”

SEC Chairman Jay Clayton acknowledged some gray area still exists regarding bitcoin and Initial Coin Offering (ICO) tokens as securities, but he laid out some generally-accepted rules: bitcoin has “been determined by most people to not be a security,” said Clayton, but ICO tokens seem to always have the characteristics of securities. “There are none that I’ve seen that aren’t securities,” Clayton said. “To the extent, something is a security, we should regulate it as a security.”

Clayton’s pronouncement is not surprising to recent observers of the crypto world. ICOs, which raised $6.3 billion in Q1 of 2018, have been subject to increasing scrutiny in lockstep with their rising popularity. It follows that they now appear to be under a regulatory microscope.

Clayton believes a primary issue is that ICO-funded startups are not transparent about the way they conduct business. Their growth has come “without the usual respect for the law that you would expect to see in the financial markets,” he said while outlining his belief that the SEC should be responsible for regulation. “Securities regulations are disclosure-based…people should follow those and provide the information [the SEC] requires,” said Clayton.

Bitcoin, however, remains outside of the SEC’s sphere of influence. Clayton conceded that today’s laws “didn’t anticipate [cryptocurrency]…our laws anticipated sovereign-backed currencies.” As a result, Clayton continued, regulation “to give people comfort is less [necessary] than it is for something that is not sovereign-backed.”

Both Clayton and Stewart agreed that additional oversight of cryptocurrency markets is necessary, but neither wants to legislate reflexively. Stewart advocated “[leaning] into [overseeing crypto markets]…rather than [waiting] for something that gets someone’s attention…when [Congress is] really not prepared.” Clayton echoed Stewart’s desire to avoid “overkill” (listing Dodd-Frank and the Patriot Act as examples.)

Government officials like Clayton have acknowledged the “economic utility” and “great promise” of cryptocurrencies. As policymakers begin to understand and regulate digital currency markets, crypto investors can be encouraged by regulation efforts thus far – and anticipate a bright future for their holdings.
 

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