That seemed to be the main takeaway for the cryptocurrency industry from Monday’s Business of Blockchain conference at the Massachusetts Institute of Technology (MIT).
On the one hand, the event was clouded by speculation that the U.S. Securities and Exchange Commission (SEC) may go as far as to classify two of the top three coins by market cap, ethereum and Ripple’s XRP, as securities. Such a determination could subject a wide swath of industry members to legal penalties – far beyond the promoters of recent initial coin offerings (ICOs) who were already on alert the last few months.
Those fears were reinforced late in the day when Gary Gensler, an old lion of financial services regulation, confirmed for the crowd that in his view, bitcoin’s two largest rivals may fit the description of securities in U.S. law.
“Ripple Labs sure seems like a common enterprise, or the Ethereum Foundation in 2014,” said Gensler, a former chairman of the Commodity Futures Trading Commission. “Ripple is doing a lot to advance the value of XRP.”
(The so-called Howey test says something is a security under U.S. law if it is an investment in a “common enterprise” offering an expectation of profits from the efforts of others.)
Yet, on the other hand, the general sentiment at the event was optimistic about regulators’ growing involvement in the space.
Neha Narula, director of the Digital Currency Initiative at MIT Media Lab, for example, told CoinDesk insufficient regulation can actually stifle innovation by deterring honest players because rampant scammers undermine market integrity.
And aligning with Gensler, Narula said, there need to be more honest conversations about the fact that many emerging cryptocurrencies are actually securities.
However, there may not be a bright line separating the two.
As Narula said:
“We’re realizing money versus equity isn’t a binary choice. It’s a spectrum.”
And that realization could have a serious impact on the cryptocurrency industry.
Patrick Murck, counsel at Cooley LLP and fellow at Harvard’s Berkman Klein Center for Internet & Society, told CoinDesk the token economy could be on the verge of a dramatic shift if the SEC agrees with Gensler.
If ether and XRP are deemed securities, cryptocurrency exchanges and general industry promoters or foundations, or anyone who sold or evangelized projects like ethereum to the general public, could be subject to legal penalties.
“It would be like shooting fish in a barrel,” Murck said, adding:
“There’s nothing magical about the blockchain that absolves you from investor protection regulations if investors have to trust you to deliver something.”
Driving that point home, Gensler in his talk cited several reasons that the way ethereum and XRP were issued and traded seemed to meet the definition of securities.
For example, the 2014 ethereum crowdsale would have created an expectation of profit for the people who purchased tokens before the network went live.
“The Ethereum Foundation offering had a 50 percent appreciation right in the first 42 days written into the offering,” Gensler said on stage. (The industry think tank Coin Center in Washington, D.C. promptly issued a statement that “ether is not a security,” rebutting Gensler’s argument.)
Meanwhile, for issuers of new tokens, it’s almost impossible to walk the line, even with more feedback from regulators and lawyers…