Has the Storm Passed For Cryptocurrency?
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It’s been a long and cold winter for cryptocurrency, facing falling market values and blizzards of regulatory crackdowns.
But with the US Security and Exchange Commission’s (SEC) ICO Framework issued this month, along with a response that travel company TurnKey Jet could sell utility tokens in an initial coin offering (ICO), hopes were initially raised in the crypto community.
Has the storm passed? And is this a sign springtime has fallen on the crypto market?
At first glance it might seem so; a sign that some ICOs are, once again, a route to raising money in the US. But, this is not the case.
There are Many Restrictions
The SEC’s restrictions from the new framework stop both the bad and the good guys.
While ICOs quickly became the mechanism of choice to crowdfund people’s ideas, this was also its downfall, giving rise to a series of cowboys who took many investors for a ride.
Just 8 percent of ICOs make it to trading on an exchange, with 80 per cent of ICOs regarded as “scams”, according to a recent study by ICO advisory firm Statis Group.
One of the most notable of “scams” was when the directors of Modern Tech, and its Pincoin token, disappeared without a trace, but not before they had effectively stolen approximately US$660 million from about 32,000 people. The SEC followed soon after with a commentary that nearly all coins were to be seen as a security.
The framework describes a list of factors which the SEC will consider while finding if something is a security or not. Among them, can the token be used immediately? Is the value tied to the good to be consumed? Is the framework already built?
The more times you say no, it seems, the more likely it is to be a security.
However, if the token isn't being used to purchase something that can be immediately consumed and the cost is tied to the value of the good to be consumed, the token is more likely to be a security.
The Token Can’t be Used for Fundraising
The framework outlines that the token must be used for prepaid services that are already in inventory.
The TurnKey Jet example provides an extremely limited scenario and further narrows the scope of what can be done.TurnKey Jet tokens can only be used for prepaid flight time; in other words, they have no other use than to fly. So, anyone who buys them must use them or lose them.
It’s been likened to the days of the horse and cart, when early laws were created for cars – you can use a car but you can only drive it at the speed of a horse and you need to wave a flag in front of it.
Consequently, based on this, it is unlikely that US companies, big or small, will use the token market to raise money that way – particularly when the platform must be built and the services, i.e. a jet service or air time must already be available (procured/paid for) to work under this model.
Has the SEC Gone too Far?
Some are saying the SEC has gone too far and heaps on a number of factors that are potentially not grounded in the law.
For big established players in the US who have deep enough pockets to go ahead and build their platforms, ICOs could be a source of capital, albeit a limited one.
For the smaller players, the decision still requires them to pursue venture capitalists (VCs) and present them with their elevator pitch.
This is particularly challenging for new and experimental business models that few VCs may understand. The necessity to build a platform first could be prohibitive as the price tag for one of these typically starts at several hundred thousand dollars.
Certainly, the framework’s exclusion of the small players was not the intention of token offerings by visionaries, such as Vitalik Buterin.
But perhaps as the SEC starts to see the unintended consequences of its framework, a more pragmatic approach will emerge.
The Asia Context
At the end of the day, this framework really hits the US market far more than the global market.
The jury is still out on whether other countries will follow in the SEC’s footsteps as the world’s lawmakers continue to wrestle with the idea of digital assets.
For Asia in particular, China and South Korea have already banned ICOs; Japan is still exploring regulations and whether ICOs are allowed but heavily regulated in Singapore.
Singapore is currently ranked second in the world by number of ICOs, after the US.
But maybe the SEC’s latest move could push Singapore to number one, a signal to crypto companies to assess the possibilities of operating in countries less opposed to digital assets.