U.S. SEC Lists Guidelines for Cryptocurrency Tokens and Exchanges

U.S. SEC (Securities and Exchange Commission) issued statement listing guidelines about Crypto Tokens sold as a part of ICO and Cryptocurrency aka digital asset exchange platforms.

SEC explicitly mentioned about market participants in trading and investments still need to adhere to federal securities law framework regardless of whether they use blockchain technologies or any other technological innovations.

SEC took actions against AirFox, Paragon, Crypto Asset Management, TokenLot, and EtherDelta's founder.

The enforcement action is broadly categorized and focused into three main areas,

1. Initial offers and sales of digital asset securities (including initial coin offerings ("ICOs")) 
2. Investment Vehicles investing in Digital Asset securities and those who advise others about investing in these securities
3. Trading of Digital Asset securities

Initial offers (ICO) and Crypto Tokens

Regardless of the terminology or technology used in the transaction, the DAO Report and the Munchee Order ( Munchee, Inc., Securities Act Rel. No. 10445 (Dec. 11, 2017) settled order) emphasize that digital assets offered and sold as investment contracts are Securities.

This fact is now emphasized from the recently SEC issued settled orders against AirFox and Paragon in connection with their unregistered offerings of tokens.

The SEC statement said, "These two matters demonstrate that there is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities."

SEC further states, "An entity that facilitates the issuance of digital asset securities in ICOs and secondary trading in digital asset securities may also be acting as a "broker" or "dealer" that is required to register with the Commission and become a member of a self-regulatory organization, typically FINRA."

The list of enforcement actions by U.S. SEC against ICOs can be found here.

Investment Vehicles investing in Digital Asset 

SEC noted that on Sept. 11, 2018, the Commission issued the Crypto Asset Management Order and that it found that the manager of a hedge fund formed for the purpose of investing in digital assets had improperly failed to register the fund as an investment company. It was emphasized that any fund or fund manager or investment vehicle holding digital assets (cryptocurrencies or tokens) should register under the Investment Company Act and the Advisers Act.

Trading of Digital Assets or Cryptocurrencies or Tokens

SEC mentioned that entity that brings together buyers and sellers for digital asset securities or crypto tokens comes under the purview of the definition of exchange under U.S. federal securities laws.  It noted that EtherDelta is a platform allows peer to peer trading of cryptocurrencies or tokens. It brings together buyers and sellers with the use of the website. Hence EtherDelta was considered as an Exchange.

These guidelines are the right way to move forward as they bring more predictability in cryptocurrency/digital assets investments though not 100 percent but it helps clear the regulatory vagueness in the crypto market.

The original U.S. SEC statement can be found here.