One If By Land, Two If By SEC.
Prepared by Colin Platt
Posted December 4, 2018
Hi, I’m Colin Platt, co-host of the Blockchain Insider podcast, and a cryptocurrency and distributed ledger researcher and specialist. This is the fifth in a series of cryptocurrency/blockchain posts that explore some of the topics that Zeth, Shaun and I found interesting and worth exploring further. As always we hope that you enjoy this series of fortnightly posts, and welcome your feedback.
Note: Nothing in this post should be construed as investment advice, legal advice, or a recommendation of any particular project or crypto-asset.
November has been an eventful month in the wild world of cryptocurrencies and permissionless blockchains. Between the Bitcoin Cash hardfork, in which the self-proclaimed Satoshi Nakamoto –Craig Steven Wright– decided that Bitcoin Cash was no longer the true Bitcoin, and that he alone –along with Canadian e-gaming tycoon, Calvin Ayre– could save it, the price of cryptocurrencies continuing to fall, the much talked about Baakt exchange tapping the brakes a bit, Steemit and Spankchain announcing layoffs, and new moves from US securities regulators on ICOs and ICO promoters. We’re all kind of left scratching our heads and trying to figure out which way is up.
Amongst all this, I was somewhat surprised when Zeth told me that November has been a very positive month for the team over at Plexus, with lots of top talent getting matched with quality enterprise projects (see our first post where we talked about hiring trends). Time to HODL CordaCoin?
So a lot to focus on, but the one topic that has been at the forefront of everyone’s –at least everyone involved in ICOs– minds, is “what does this action by the Securities and Exchange Commission (SEC) mean?” and “are ICOs dead?” Remember, I’m not a lawyer and this isn’t legal advice.
Starting with the news, the SEC announced two sets of settlements, the first involving Airfox and Paragon Coin, and the second involving Floyd Mayweather Jr and DJ Khaled (Cue the ‘you smart’ memes). My friend Stephen Palley (who is actually a lawyer) already has a great write-up on the first one, I suggest you check it out. What is interesting about both of these cases, is that they are different from previous action, and everyone had been warned previously. The last major enforcement action, in April, on Centra involved fraud. People raised money for an ICO then –allegedly– took off in the Lambos they –allegedly– paid for with ICO contributions. That’s not happened here. Paragon and Airfox were charged with selling unregistered securities, and our celebrity friends were charged for having promoted unregistered securities (actually, for Centra), without disclosing that they were paid for this promotion.
Let’s take this in reverse order. The takeaway for most people reading this from the Mayweather/DJ Khaled settlement is probably fairly limited, although what do I know? You could be a major celebrity reading this after having promoted an ICO, if so my only suggestion is to contact a lawyer. The broader, more likely scenario, is that people working with or holding tokens that have received endorsements from celebrities or otherwise should hope that if they were paid, it was disclosed.
On the first case, Paragon/Airfox, there are probably a lot of people at firms that are involved with tokens that conducted and ICO or thinking about joining one. First question, will all tokens get shut down? Answer: I don’t know, (still not a lawyer) it seems hard to imagine 100% of them going away, but it is hard to guess. Those firms should probably speak with a competent lawyer and assess their options. People involved in those projects should also consider having a dialogue with the leaders of the projects to ask what has been done to ensure that their project has not run afoul of regulations, and where it has they have worked to comply with the relevant authorities’ investigations. Also, don’t panic. Even if you were involved with an ICO project, you may not have done anything wrong. It would be wise to seek legal advice in this regard however.
There is good news though, we now know where we stand. The problem isn’t necessarily issuing tokens, but ensuring that they follow the rules and regulations. Several projects have leveraged crowdfunding platforms and/or restricted sales of tokens that could be consider securities to ensure compliance and should not have this hanging over their heads. We’ve also seen a lot more proactive regulatory support for selling securities tokens in places like Switzerland, Gibraltar, Malta and Liechtenstein. These rules combine innovative technologies with common sense rules and regulations designed to ensure their success. Projects going down these routes should hopefully be on the right track towards success.
For those still not convinced that working with a project using tokens is for them, let’s circle back around to my snarky comment about CordaCoin at the top. There will likely soon be a lot of people with hands-on experience with smart contracts and blockchains moving to enterprise DLT and non-token applications of these technologies, at the same time as these platforms are maturing. I’d expect that this should be somewhat of a resurgence in development around these projects. Have a chat with the team at Plexus if you’re curious.
As always we love hearing from you, let us know what you think, and how you view the next phase of these technologies and markets.