Taking the 'Crypto' Out of Cryptocurrencies: How securities laws and regulations impact this booming business.

Author:Jacobsen, Brad R.
Position::Legal Brief

During 2017 it appeared you couldn't lose money investing in Bitcoin, initial coin offerings and other cryptocurrency offerings (collectively ICOs). Not since the Tulip Bubble of 1637 had prices of a single commodity (Bitcoin) gone up so much so quickly. As the price of Bitcoin skyrocketed, hundreds of other cryptocurrencies entered the market, and investors anxiously swept them up, hoping to catch the next massive bubble on the way up. Everyone was looking to be the next "Bitcoin billionaire."

While the escalation of tulip prices to the point that bulbs were more valuable than real estate was irrational, at least anyone purchasing a tulip bulb knew what they were getting. The same can't be said for everyone who purchased cryptocurrency. Indeed, the prefix "crypto" means "secret" or "hidden," and one of Bitcoin's principal claims to fame (and for some, its principal appeal) is the anonymity surrounding its ownership. Moreover, it is often unclear what purchasers of cryptocurrency are getting--is it currency, is it equity in a company, or is it something else?

Are ICOs securities?

Whether you are considering conducting an ICO to raise capital, investing in cryptocurrency, or if you lost money in someone else's ICO, it is important to consider how federal and state securities laws impact the cryptocurrency world.

The first and most important question is whether securities laws even apply to sales or issuances of cryptocurrencies. Securities are more than just equity in companies or debt instruments. A broader definition also includes "investment contracts." In 1946 the Supreme Court in SEC v. W.J. Howey Co. defined a security to include "an investment of money in a common enterprise with profits to come solely from the efforts of others." In a later case, the Supreme Court stated a security encompasses "virtually any instrument that might be sold as an investment."

Many ICOs have been conducted by "issuers" claiming that the "coins" being sold were "utility" tokens or contracts and not securities. A "utility token" gives the token holder the right of access to a particular product or service that the issuer is offering or intends to offer. In December 2017, however, the SEC warned that it considered coin offerings to be sales of securities and would regulate them as such. While this statement came as a shock to many, the SEC was simply restating long-established case law and practice used by it and other state and federal regulators.


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