Market volatility is inversely correlated to legal uncertainty.
However, before regulators can take a reasoned view on cryptocurrencies and devise suitable frameworks that both protect investors and promote innovation, they face the tricky task of categorising tokens.
Last Friday, the US Securities and Exchange Commission (SEC) ruled that ether, along with bitcoin, is not a security, ending months-long speculation. However, William Hinman, the SEC’s corporate finance director, said that ether had perhaps been a security in the past, which leads to the problem of regulating digital assets that fundamentally change their nature over a period of months.
Of course, such assets do already exist; convertible bonds, for instance, let bondholders exchange debt for equity. However, in this case, there is a clear action that is required by the bondholder. With transient digital assets, however, no such action on the part of the tokenholder exists.
In the US, a project called the Simple Agreement for Future Tokens (SAFT) is reconciling this problem by positing that pre-functional utility tokens – tokens that unlock a benefit for the tokenholder on a decentralised network that is not yet built – should be considered securities. On the other hand, functioning utility tokens are not securities because their value is derived not from “the efforts of others” as required by US federal law but by technological factors and network effects.
The SAFT project argues that ICOs should avoid non-compliance with securities law by refraining from issuing pre-functional utility tokens. Instead, a simple investment contract (a SAFT) should be issued to investors, who will then be rewarded with discounted functional utility tokens (that are not deemed as securities) when the project’s network goes live. The SAFT appears to fit with the SEC’s latest ruling that while ether is not a security, most ICO tokens are.
Ultimately, skirting around securities laws does not give token issuers the certainty they want. It also fails to address the question of what asset class functioning utility tokens belong to; if cryptocurrencies are currencies, and tokenised securities are securities, there is still a huge grey area inhabited by utility tokens.
Nevertheless, since the SEC’s decision, the price of ether (ETH) rose from a low of $477 to $540 within a matter of days. The president of CBOE Global Markets responded by saying that the decision also cleared a major stumbling block for the release of ether futures, which undoubtedly helped buoy ether’s price.
Bitcoin (BTC), meanwhile, is trading at nearly $6,800, which is a recovery from recent lows of $6,300 but hardly enough to cheer up investors that bought in earlier this year. The entire market has come under some degree of downward pressure in the last 48 hours after Korean digital exchange Bitthumb was hacked and $30m worth of digital assets were lost.
Meanwhile, Ripple (XRP) has stayed mostly flat in the past few days and is now sitting at $0.54. EOS (EOS), however, has retreated nearly 40% since the chaotic launch of its mainnet earlier this month and is trading at $10.55.
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