Securities Regulatory Body Declares Cryptocurrencies as Financial Securities
In the rapidly evolving world of digital finance, two significant developments have caught the attention of the global financial community. On one side, the Russian Finance Ministry has published a new draft law, "On Digital Financial Assets," aiming to strictly regulate cryptocurrencies and Initial Coin Offerings (ICOs) within its borders. On the other side, the Securities and Exchange Commission (SEC) in the United States has been actively enforcing regulations on ICOs, treating many digital tokens as securities subject to federal laws.
The Russian draft law, while comprehensive in its scope, does not provide information about the amount of funds raised through ICOs in Russia nor does it address the classification of digital tokens as securities or not. Conversely, the SEC has declared that digital tokens in prominent ICOs are securities, making it a violation of federal investment laws. Notably, the SEC did not list which specific ICOs are securities; decisions will be made on a case-by-case basis.
ICOs, initiated by publishing a white paper about a company's plans regarding digital coins, have been raising record funds at a rapid pace. Tezos, a new blockchain project, raised $232M, the largest ICO to date this year. Companies have raised hundreds of millions of dollars through various ICOs, with fewer disclosure requirements compared to traditional Initial Public Offerings (IPOs).
In the United States, the SEC is working on modernizing its rules to accommodate the unique attributes of crypto and token offerings. The agency is proposing exemptions and safe harbors tailored for ICOs to facilitate capital formation while ensuring investor protection. Issuers of ICOs must comply with disclosure requirements akin to those for other securities offerings, such as disclosing the plan of distribution, risk factors, and financial information. In addition, ongoing reporting obligations under the Securities Exchange Act of 1934 could apply if tokens are publicly traded securities.
The new draft law in Russia stipulates that all trading will be done via cryptocurrency exchanges that are registered in Russia. However, it does not discuss the possibility of businesses pursuing ICOs overseas or the potential impact on the price of Bitcoin, Ethereum, or other digital coins. Interestingly, the new draft law does not mention the SEC's warning about federal securities laws applying to those who offer and sell digital tokens.
While the new draft law in Russia may tighten the regulatory environment for cryptocurrencies and ICOs within its borders, the SEC's recent rulings may deflate the growing ICO bubble in the United States. However, this does not stop businesses from pursuing ICOs overseas, as evident by the record-breaking funds raised globally. The price of Bitcoin and Ethereum, two popular digital coins, fell 10% today, with more volatility expected.
In conclusion, while both Russia and the United States are moving towards regulating cryptocurrencies and ICOs, their approaches differ significantly. The SEC's focus is on treating many ICO tokens as securities subject to federal laws, while the Russian draft law aims to create a comprehensive regulatory framework for digital financial assets. The evolving landscape of digital finance continues to present challenges and opportunities for businesses and regulators alike.
References: [1] SEC.gov. (2018). Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO. [online] Available at: https://www.sec.gov/litigation/investreport/34-81207.pdf
[2] SEC.gov. (2019). Framework for "Investment Contract" Analysis of Digital Assets. [online] Available at: https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets
[3] SEC.gov. (2019). Statement of Chairman Jay Clayton - Cryptocurrencies and Initial Coin Offerings. [online] Available at: https://www.sec.gov/news/statement/statement-chairman-jay-clayton-cryptocurrencies-and-initial-coin-offerings
[4] SEC.gov. (2019). Disclosure Guidance: Topic No. 9 - Digital Asset Securities. [online] Available at: https://www.sec.gov/corpfin/disclosure-guidance/topic-9-digital-asset-securities
- Despite the new Russian draft law aiming to strictly regulate cryptocurrencies and Initial Coin Offerings (ICOs), it does not address the classification of digital tokens as securities or provide information about the amount of funds raised through ICOs in Russia.
- In contrast to the Russian approach, the Securities and Exchange Commission (SEC) in the United States declares many digital tokens in ICOs as securities, subject to federal investment laws, but does not list specific ICOs deemed securities, with decisions being made on a case-by-case basis.