The consequences of the recent deal the SEC made with Airfox and Paragon
On the 16th of November this year (2018) the SEC announced that they have reached a deal with 2 ICO companies that includes a penalty settlement but also the registration of their tokens as a security. There are many question marks remaining, like what type of security those tokens will be converted to, but what i want to explore is the potential consequence on the industry.
From the get go i want to focus my opinion, and this post, on honest projects who raised funds via a token sale. By honest i mean projects who kept in-line the best interests of their token holders and company, along with their own. By honest i mean projects who do a genuine effort to use ALL their funds and time to develop a proudct that will serve their token holders. Real fraud projects can be fought with existing legal means like any other fraud.
How Can crypto change the world? I’ve been in the industry for many years now and the past 3 yeas i’ve held the strong belief that blockchain (and crypto assets in it) has the potential to radically change the financial industry for the good. Do to finance what the internet did to the content, music, video and a ton of other industries. The way i imagined it is 2 fold: 1) “money” like crypto assets (bitcoin, ETH and more) will serve as the fuel for this revolution and 2) new asset classes like utility tokens will serve as the engine. Those 2 things go hand in hand, can’t live to their true potential alone.
The reason is that although cash plays a big part of the economy, most individuals do not experience difficulties using it in the developed world. The consequence is that most BTC holders are actually HODLING for a profit, most rarely use their bitcoin for anything else. There has to be a real use-case for crypto assets (which are currency like), a use-case so unique that we simply can’t use traditional money for it. In my opinion one of the most incredible use-cases we’ve seen is the ability to create and buy other asset types, some of those asset types are for accessing a product, governance in a decentralised network, discount for buying a service and much more. When we couple all of that together it seems to create a whole economy around crypto assets. Exactly what we need for progress in the financial sector.
The consequences of securitising all tokens is that all of that potential is simply vanished. It transforms into a very limited tool to make the existing system just a bit more efficient, and even that is up for debate and question. A security is not just another “asset class”. It’s a highly regulated piece of legal document that was shaped by hundreds of years of history. A piece of legal document that limits significantly who can hold it, where it can be traded, who can buy it and in what amounts. Securities were shaped by a system where people can be ripped off because of complicated legal systems, it was designed in a world where financial power is very centralized. Unlike blockchain. Securitising ALL tokens to help protect token holders is like cutting the leg to save the toes, it ain’t gonna work! Those token holders will be left with a non liquid asset, no legal protection or influence on what type of security they get and no influence even on if they want to make that transition. Both the company and the token holders will loose since non of them wanted to hold or issue securities from the start. If they did they could have used the legal frameworks already in place.
Securitising tokens does not equal receiving shares of the company. Many supporters of securitising ICO tokens think that it’s automatically means token holders will receive shares in the company. That is very misleading, to say the least. Securities are not just shares in a company, they can take many forms and shapes. That conversation will depend on how the token was issued and it’s actual “utility”. Most likely not all tokens will be shares.
“Decentralisation” seems to be a deciding factor for deciding if a token is a security. Well thats all fine and well but who gets to decide what is “decentralised” enough? and if it’s the regulator that doesn’t seem very decentralised to met. Also why would that even be a factor? isn’t the goal to protect token holders? they can’t be ripped off just because it’s a decentralised system?
Don’t confuse the need to have governance in crypto with the path to it’s destruction! I will be the first to say that the ICO model is not mature enough to lead big funding rounds and that it lacks the governance to keep the interest of the founders, company and token holders in line. But destroying it by rolling it back to the “legal” framework we already have is just plain stupid. There will be no progress in that sense. All the critics who love to shame the ICO model but praise bitcoin as a currency/ gold forget that this industry had the same discussion for years about bitcoin’s legal standing, especially in all of it’s pump and dump rides (not to mention various notorious use-cases). It’s nice to think of bitcoin now as the responsible adult but it has a very colourful past as well.
Some tokens are security tokens if they hold in their T&C a commitment to a right that otherwise would have been represented in a security like dividend, voting, interest and more.
Going Forward i think we can all agree that a much stronger governance structure around crypto companies needs to be developed but this structure MUST respect the properties of the blockchain movement. Otherwise this will all be for nothing and no real progress will be made.