A group of lawmakers want the Securities and Exchange Commission to provide more official guidance on initial cryptocurrency coin offerings.
In a letter sent to SEC Chairman Jay Clayton Monday, 16 lawmakers —14 Republicans and two Democrats in the House of Representatives — asked for clearer guidelines on how he sees key financial regulations applying to the burgeoning digital assets. Reps. Ted Budd, R-N.C., Tom Emmer, R-Minn., Warren Davidson, R-Ohio, and Darren Soto, D-Fla., led the letter.
“Please expand on what criteria the SEC is currently using — specific to digital tokens — to determine under what circumstances the offer and sale of a digital token should properly be considered an ‘investment contract’ and, therefore, an offer or sale of ‘securities’ under the Securities Act and the Howey test,” the congressmen wrote, invoking a key law and legal ruling in the field.
It’s a major issue for a growing industry. Initial coin offerings, in which startups raise tens of millions of dollars through the sale of a digital token, often before even beginning operations, have exploded in the past two years, raising billions. But the digital tokens sold in those ICOs often fall in value after their initial sale, and projects frequently fail to materialize or succeed following fundraising, leading to investor protection concerns.
Clayton and other SEC officials have said before that laws already governing investment assets like stocks and bonds apply to digital currencies in most instances, meaning that the SEC expects initial coin offerings to register with the SEC as securities offerings. But they’ve also allowed for the possibility that a digital currency might grow past that definition due to alternative uses, like decentralized computing, aside from raising money for companies.
Bitcoin, the cryptocurrency with the world’s largest market value, and Ether, the second-largest, appear to have already reached that point. Ether is especially designed for use in decentralized computing, basically large-scale peer-to-peer computing.
In testimony before the Senate Banking Committee and during public interviews, Clayton has repeatedly said that ICOs are securities offerings, meaning that they have to register with the SEC and disclose more information to investors, as companies crowdfunding or offering stock do, or face potential regulatory penalties and subsequent class action lawsuits.
Clayton’s past remarks speak to how he views ICOs broadly, but he and others have said that some tokens may cease to be considered a security if used for a purpose other than raising startup funding, leading some firms to claim a so-called ‘utility token’ exemption.
The lawmakers writing Clayton ask for more concrete guidance on the topic from the SEC, but also push the agency to provide leniency for cryptocurrencies as an emerging technology.
"We believe that the SEC could do more to clarify its position," the lawmakers write, adding that they're concerned the financial regulatory agency will act through enforcement alone.