In today’s episode, we are going to explore some of the complexities of a Security vs. Utility token which are fresh on our minds after the recent SEC announcement about Ether and Bitcoin not being considered securities.
William Hinman, the SEC’s Director of Corporate Finance made the announcement:
“Strictly speaking the token, the coin, whatever the digital information packet is being called all by itself, we don’t think is a security. Just as oranges in the Howey case were not securities. Essential to determining whether a security is being offered, however, is how it’s being sold and a reasonable expectation of purchasers. When someone buys a housing unit to live in it’s probably not a security but under certain circumstances, the same asset could be offered and sold in a way that could cause investors to have a reasonable expectation of profits based on the efforts of others. If the housing unit is offered with a management contract or other services where purchases are encouraged to invest rather than reside, it could be a security. Case law tells us that,” Hinman explained during his speech.
Securities are the talk of the regulator town and perhaps less so in the Cryptosphere now that we have a solidified answer for Bitcoin and Ethereum. However, many other projects have uncertain futures as to their designation which may bring pause to would be Blockchain empire builders.
The Street, a finance-focused publication, defines securities as follows:
“A simple definition of a security is any proof of ownership or debt that has been assigned a value and may be sold. (Today, evidence of ownership is likely to be a computer file, while once it was a written piece of paper.) For the holder, a security represents an investment as an owner, creditor or rights to ownership on which the person hopes to gain profit. Examples are stocks, bonds and options.
The Securities and Exchange Act of 1934 provides this more complicated definition, but you might want to grab a cup of coffee: “The term ‘security’ means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities…”
To help us demystify this fascinating (yet complex) situation of Securities vs. Utility tokens we brought in Joe Ciccolo, an expert in building BSA/AML programs as well as over 10 years of banking compliance.
Joe founded BitAML, a regulatory compliance advisory group, to help Blockchain startups and innovators to remain above board in a rapidly shifting (and uncertain) regulatory landscape.
After listening to this episode you will learn:
- What are Securities? (and how they are created and distributed?)
- What the Howey Test is
- Who is in charge of securities and where they derive their power from
- Why we have securities (and why investors like them)
- What are ICOs? (What are security tokens v.s. utility tokens?)
- What are some asset classes that can be “tokenized”? (E.g. Real estate, Art etc)
- How is KYC/AML connected with the process of security tokens?
- Thoughts and reactions to SEC “ruling” about Ethereum and Bitcoin not being securities
- How agencies like the SEC typically come to decisions like this and their deliberation process like
- What this means moving forward for ICOs and other projects that might be securities
- Why we need securities considering these technologies exist regardless of regulation
Further Reading and Resources
- William Hinman SEC profile
- SEC Spotlight on Initial Coin Offerings and Digital Assets
- Ether Not a Security, SEC Director of Corporate Finance Announces at Crypto Summit – CoinCentral
- What Are Securities (in Finance)? – TheStreet Definition
- BitAML Blog
- LAB Radio Episode 1 with Joe @ Inside Bitcoins San Diego
- LAB Radio Episode 13 – Introduction to BitAML
- Howey Coins
- The History of Banking
