First Stage Investor

SEC Chief: Bitcoin Not a Security

SEC Chief: Bitcoin Not a Security
By Adam Sharp
Date June 7, 2018

For years, we’ve been thinking about how (and if) the Securities and Exchange Commission would regulate bitcoin. Yesterday, we almost got our answer when SEC Chairman Jay Clayton drew a line in the sand between bitcoin and initial coin offerings (ICOs). And it was mostly good news.

“Cryptocurrencies – these are replacements for sovereign currencies,” Clayton said on CNBC. “They replace the dollar, the yen, the euro with bitcoin. That type of currency is not a security.”

Clayton’s declaration that bitcoin (and other cryptocurrencies like it) are not securities is huge news. It’s what we’ve been hoping for. It means that the SEC will not be involved in regulating the purchasing or trading of bitcoin. That’s a big win for investors. It also means that other cryptocurrencies that have not had ICOs should be safe too. The SEC will view them as replacements of sovereign currencies.

Existing exchanges like Coinbase and Bittrex won’t have to comply with SEC regulations for trading bitcoin – which would have been an expensive proposition. That keeps costs for investors down, which is always a good thing.

And in escaping SEC regulation, there’s more room and space for people and companies to innovate in bitcoin and altcoins that skipped the ICO route.

The future of coins that had ICOs, however, is a little less clear.

“Let me turn to what is a security,” Clayton said on CNBC. “A token, a digital asset where I give you my money and you go off and make a venture – you have some company you want to start… and in return for me giving you my money, you (are given) a return or you can get a return in the secondary market by selling your token to somebody, that is a security, and we regulate that. We regulate the offering of that security and we regulate the trading of that security. That’s our job and we’ve been doing it for a long time.”

That means a coin like Ethereum, which had an ICO, is likely to be considered a security under this line of thinking. We don’t know exactly how this will play out for now, but I don’t think they’ll do anything that would seriously harm most of these innovative projects.

Clayton did leave himself an out for Ethereum and other coins that had ICOs but are so decentralized now that they don’t meet the conventional definition of a security.

“That’s a question that is out there and will be answered in the specific facts and circumstances,” Clayton said when asked about the possibility of removing the security designation from coins that offered an ICO.

That cracks the door open for Ethereum and other coins like it. But avoiding SEC regulation is far from a sure thing.

We should note at this point that while Clayton’s announcement is huge news, it only “represents” policy. The SEC didn’t issue an official written guidance or adopt a rule about bitcoin. Instead, it declared policy on TV. In the realm of politics, that sort of announcement is more than a trial balloon, but less than policy written in stone.

Clayton has decided what he wants the policy to be, but has left room to change his mind if people don’t like the idea.

So far crypto markets have reacted mostly positively to Clayton’s comments. Bitcoin and Ethereum are up slightly over the last 24 hours. This is a good sign.

It tells us that, by this point, crypto investors have already factored in the possibility of government intervention as being extremely likely. (This is why we’ve been discussing this topic for months.)

Our portfolio should weather any coming regulatory storms well. Many of our picks – like bitcoin – did not have an ICO at all, so they will almost certainly not be classified as securities.

Others could be classified as securities in the future, but I strongly suspect that the SEC will go easy on cryptos that are well-intentioned projects and didn’t involve fraud. There is simply too much innovation happening for the government to abruptly stamp it out. It would cause a huge backlash.

Just today, Coinbase also announced that it is in the process of obtaining a license to trade “blockchain-based securities.” I suspect that Ethereum will fall under this category eventually (as will many other cryptos). That’s not necessarily a bad thing. It could be very good, in fact, if it clarifies all the regulatory uncertainty and clears the path for further institutional investment.

We’re keeping a close eye on this and will update you as the situation develops. For now, I simply recommend continuing to hold strong.

So why did Clayton decide to announce something on CNBC this week? This is speculation, but here are three possibilities:

  1. With the Department of Justice investigating schemes to influence the price of bitcoin, the government needed a single definition of what bitcoin is, and the CFTC’s commodity definition won.
  2. The SEC is getting closer to approving a bitcoin ETF, and this is a precursor to that decision.
  3. With Goldman Sachs, Signature Bank and other banks moving into bitcoin, Clayton decided to do his friends a favor and calm the markets regarding bitcoin.

It wouldn’t surprise us if it was a combination of all three of these reasons that led to the announcement.

In the end, it might not matter why Clayton announced this on CNBC. As long as this remains official SEC policy, it’s good news for bitcoin – and for the people and institutions that want to invest in it. And that’s what really matters.

Good investing,

Adam Sharp
Co-Founder, First Stage Investor

P.S. Here are other relevant quotes from Clayton’s recent CNBC interview. If you’d like to watch the entire interview, you can do so on YouTube here.

“If you have an ICO – or a stock – and you want to sell it in a private placement, follow the private placement rules. There’s no secondary trading. You have to do that. If you want to do an IPO with a token, come see us. File financial statements. File disclosure. Take the responsibilities our laws require. And we’re happy to help you do that public offering.”

Clayton declined to comment on whether Ethereum or other crypto assets were securities, referring back to the definition of securities. “Am I giving you my money for you to go off in a venture where I’m relying on your effort and the efforts of your colleagues?”

“We are not going to do any violence to the traditional definition of a security, which has worked well for a long time.”

In regards to SEC concerns about potential bitcoin ETFs: “Is the pricing something people can rely on? Also, asset verification. And our communication to the marketplace on this has been very clear.”

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