SEC states ICO tokens are securities

The fintech boom has seen a wealth of cryptocurrency-related technology emerge and a common means for the developers of this technology to raise finance has been through the organisation of initial coin offerings (ICOs). ICOs have become big business and there are dozens on the go at any one moment. The buzz around ICOs has gained a lot of attention among the fintech industry and in the media as the hype around cryptocurrencies continues to grow, especially when the amount of money involved reaches new heights. However, a recent ruling in the United States could throw a spanner in the works.

SEC states ICO tokens are securities
SEC states ICO tokens are securities

ICOs have been subject to plenty of speculation. The way they function is quite similar to initial price offerings (IPOs), the format used in the traditional financial sector where shares in a company are sold on the stock market. However, as ICOs are part of a different financial system, one that operates outside regulation and legislation for now, there is a lot of uncertainty about the rights of investors. ICOs will usually explain what your investment gets you and what you are entitled to afterwards. Practically every ICO differs in this point as what is part of one ICO may not be part of another. In short, there is no standardised format for ICOs and this throws up a load of questions when it comes to investing in them.

On the 25th of July, the United States’ Security and Exchanges Commission (SEC) reported that the tokens on offer during the DAO ICO last year can legally be considered securities and, as such, are subject to the laws governing securities and their transactions. While not proceeding with charges against DAO, the SEC warned that: “The federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.”

What does this mean for the future of ICOs? The main consequence of the SEC’s ruling is that ICOs will now be subject to closer scrutiny from the SEC and, as such, the need to be more careful with how ICOs are conducted is a growing concern for those in the fintech industry.

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