The SEC has found itself in a difficult position as they gets closer to making their decision as to whether or not ICOs, in particular Ethereum are securities due to how they chose to raise money and issue the initial tokens.
However, they are in a difficult position where no matter what they choose to do, they end up losing in almost any scenario. As a regulatory body, their goal is to regulate, that’s what gives them a purpose and a paycheck, and that’s what has them between a rock and a hard place.
Let’s take a look at Ethereum. The SEC and CFTC are both looking into whether its ICO in 2014 can be considered a sale of a security and regulated as such. Their reasoning for doing so is that a central party sold an asset with the implied suggestion that the price would increase due to the work of others. This would qualify it as a security under the Howey test. However, Ethereum claims that miners now control the operation of the blockchain, not a centralized party and that new tokens have been created via mining, not sold. However, the initial tokens were sold so that could lead to different tokens either being considered a commodity or a security. A tricky situation indeed but it would seem that at least the initial tokens issued do qualify as a security.
But the real issue comes down to precedent and this is what puts the SEC in such a tight spot. If they consider the Ethereum ICO in 2014 a security sale, they have no choice but to enforce rules and laws regarding such a sale. Which means fines and penalties, as well as the ability for investors to sue Ethereum for damages if they lost money. So this will pretty much kill Ethereum, at least in the short term. Not only that, exchanges won’t be able to trade it anymore, as it will get delisted by most legitimate exchanges as they are not licensed to trade securities.
Of course, the above scenario would be like the SEC killing Ethereum. Many people will lose money and many people will question the motives. If the job of the SEC is to protect people from losing money, why did the SEC just cause thousands and thousands of people to lose money? It’s a tough situation for the SEC to explain.
But, the other option open to the SEC is just as bad for them. If they do nothing, it means that anybody can now raise money in almost any way they see fit. By doing nothing they set a precedent that ICOs are totally beyond the reach of the SEC. Although they have already started prosecution of some ICOs, most of those were for fraudulent claims and outright scams. So by doing nothing with Ethereum and just letting it go on, they are giving up their claim to have any jurisdiction. Anyone they go after now can just claim selective enforcement as larger ICOs remain untouched by the SEC.
So as you can see, the SEC is in a spot where they can’t really land on one side or the other without harming themselves. It could mean they are looking at some middle of the road approach. Possibly fines and penalties for existing ICOs like Ethereum, and then tougher enforcement for ICOs moving forward under security laws. But even with this, it still will leave current ICOs possibly open to lawsuits from investors who lost money.
Either way, we may get an answer soon as the SEC and CFTC are meeting May 7th to start discussing the topic.