There could be a lot more to come now that regulators are specifically saying that crypto tokens are securities.
The SEC has been taking a lot of heat for not doing more to get ahead of the FTX debacle. Now, it appears they are dropping the hammer. In a complaint last night, they defined the FTT "token" at the heart of that exchange's problems as an "investment" with profit potential, or in other words, as CoinDesk reports, as a security.
This should not exactly come as a surprise, since, as Amy Castor reports, the SEC has "consistently said for many years that basically, crypto tokens are securities under the Howey test." As the SEC has explained, "The U.S. Supreme Court's Howey case and subsequent case law have found that an 'investment contract' exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others." (Emphasis mine.)
Because the FTT token could increase in value, based on usage of the FTX platform, and benefit those holding it, then it's an investment contract, the SEC asserted last night. Which means that it--and any other such crypto tokens (which is to say, most of them)--falls under the SEC's jurisdiction, has to follow securities law, and is subject to SEC enforcement.
Again, it would have been nice if all of this enforcement had happened perhaps before the FTX platform collapsed--and it wouldn't necessarily have stopped Sam Bankman-Fried's alleged $8 billion theft of customer money. But tighter enforcement of tokens in the first place could have kept them from mushrooming in size and enabling his brazen actions.
Or as former SEC official John Reed Stark warned, "Clearly, the SEC just blasted a shot across the bow of crypto-exchange tokens. More proof that the SEC crypto-regulatory onslaught...is poised to grow exponentially." He points to ICOs as a precedent. "Now the time has come for SEC regulation of exchange-produced tokens, which are the glue that binds the incestuous crypto-ecosystem grift," he wrote, adding, "Hallelujah."
Some see even more dramatic implications; "If tokens are securities, many, MANY people broke the law," warned one pundit on Twitter. "Entrepreneurs, promoters, and--yikes!--prominent venture capitalists." Maybe that's a stretch, but kind of like the Federal Reserve doing massive rate hikes to correct its previous overstimulus, it wouldn't be surprising to see the SEC get extremely tough on crypto now to make up for being too lax before many of these exchanges collapsed.
And now, if crypto exists as pure regulatory arbitrage, as some have argued, this kind of enforcement should quickly reveal whether it can survive once it has to actually play by the rules. If it can't, there's our answer. If it can survive, hopefully it's the truly innovative aspects of crypto that can reveal themselves and prove this industry deserves to have a real future.
See you at 1 p.m!
Kelly
P.S. If you missed our excellent Brookings debate on Tuesday over whether to regulate crypto--which covered many of these points--you can watch it here.
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