ICOs are Almost Certainly Going to Be Treated as Securities

The Clock is Ticking on Regulation in the Cryptocurrency Space; Have You Prepared for that, or are you in Denial?

As we have essentially known for sometime, ICOs are almost certainly going to be treated as securities by the SEC. This means about 1/2 of the top coins are likely to be considered securities by the SEC.^[1][2]

UPDATE JUNE 2018: The SEC announced that Bitcoin and Ethereum are not securities. It is unclear if other major coins will avoid being labeled securities as well. With that said, it is confirmed that many (but not all) ICOs ARE securities.

It’s important to internalize this now and not wait until the market potentially reacts and panic. In fact, this news isn’t necessarily something to panic over and might actually be part of what brings crypto into the mainstream. Still, it is also the sort of thing that one can imagine causing a mass panic at first.

While the market should have already reacted to the news, as it has been gradually released a few times a month for months now, if I know markets…. I would wager we have not seen the full reaction yet.

We see this all the time.

A Federal entity makes themselves clear, over and over, firing warning shots all over the place for months, the market ignores the shots manically bidding up an asset, and then when the entity finally pulls the trigger and puts the rules in place everyone panics for a minute like the news came out of thin air, and then after the blood is on the streets, the market recalibrates and goes on as if nothing has happened (often even rallying).

It was like this with the FED raising rates, with the Facebook Cambridge Analytica thing, and with countless other things in every market I can think of.

That is fine if you are running a complex gambit, where you expect and plan for the panic event, and have your strategy planned, but if you are a regular investor, who is ignoring the news (because the community hasn’t harped on it yet), and then you get scared into making short sighted moves, it isn’t going to be great for you (point being, do not do that).

Essentially people should be ready to hear news that the majority of top coins, all of which started life as ICOs, are securities and that all exchanges trading them have to comply with SEC rules.

That means EOS, Ethereum, Ripple, Cardano, TRON, NEO, IOTA, and more could be treated as securities (but not necessarily Bitcoin, Litecoin, Bitcoin Cash, and Monero). Meanwhile, I would suggest Dash and Stellar (which fail some tests, but are questionable in other ways, think centralized teams and master nodes, are in a slight grey area; although both are potentially more toward the exempt group).

Why would some coins be considered securities and not others? It has to do with the qualities they have. The coins that had fundraising rounds, and the Coins which have central teams behind them, and generally the ones that have qualities of ICOs, are all potentially subject.

Meanwhile, substantially all exchanges that trade one set of coins trades the other set.

This is to say, the ICO loophole is almost certainly going to be used by Federal authorities in the US to essentially regulate the entire cryptocurrency space.

Meanwhile, if you look at where we are in the chart in 2018 compared to 2014, if this news comes out in the next few months, which it likely will, it has a chance to creating a crypto winter.

In many ways the writing is on the wall, and I’m not 100% sure the best way to react, but knowing is half the battle.

In my opinion the important takeaway here is that 1. regulating the crypto space is almost certainly a step toward a bigger brighter future for crypto and mass adoption 2. especially since that is the case, the market is likely to use that news as an excuse to drop the price (as that means big players who don’t get psyched out can use it to increase their holdings).

Meanwhile, even if news like this creates a “crypto winter” (meaning the price falls below key levels and gets stuck for some time) I think its clear the end result will be an epic rally at some point in the future.

Essentially, my suggestion is to be aware of the possible world, plan for the best and worst, and have your strategy in place early to make sure you aren’t reacting emotionally when the news hits.

PROOF: For one, just Google “SEC cryptocurrency.” You can see by the sheer amount of CNBC articles and SEC interviews and documents that this is coming. Otherwise, you can check out our page on the SEC and crypto see where we cite things (it has become more and more clear that the clock is ticking as time goes on), think about how Coinbase is getting out in front of this, or see the few recent citations below. All these things are telling the same story. No one knows for sure what is up, but in my opinion the SEC is being pretty darn clear and all the signs are there.

COUNTER ARGUMENTS: This news has come out a few times, and we have written about it a few times ourselves. It usually gets this counter argument: People say, “This is FUD, the Ethereum team talked with lawyers and they are confident that Ethereum [or insert your favorite ICO-ish coin here] isn’t a security, it is a utility, blah, blah, blah.” While that is all well and good, I’ve been aware of that argument since I first researched the issue, and that to me sounds like people being in denial about whatever coin they are in denial about (it is a fine argument, but it also feels a bit like Ross Ulbricht’s rock solid defense… dude, you are up against the Federal Government, what are you not getting about this?) I’m of the opinion that the SEC clearly has the upper hand here, and that is what we should prepare for. The idea here is to prepare for the worst, and for what is very likely reality, and not prepare for the way we want the world to work. We don’t work at the Ethereum foundation, so for us, if Etehreum’s price drops while people scramble, let’s not panic and just make sure we have some extra money to buy more Ether. SIMPLE. If the Ethereum foundation can wiggle out of following rules while all the ICOs that live on it are subject, great that works too. The thing to keep in mind is that the regulation is coming because of the success of crypto, not in spite of it. Just gotta roll with it and make it to the next wave in a favorable position. That is something that is best done be being realistic about what is likely coming.

1. SEC director ‘underwhelmed’ by rate of cryptocurrency exchanges self-reporting. CNBC.com.
2. SEC chief says agency won’t change securities laws to cater to cryptocurrencies. CNBC.com.