To Be or Not to Be a Security: SEC vs. State of Wyoming



@lawlesstech



Since the report on The DAO investigation, the SEC has clearly shown that it will apply strict securities legislation to token sales, effectively deterring blockchain-projects. Recently, the SEC filed a complaint against AriseBank and halted the project’s token sale. Several days after the SEC took actions against AriseBank, the state of Wyoming has proposed a new bill declaring that, in certain cases, blockchain tokens shouldn’t be subject to securities laws.

The lawless.tech team went over all the nuances to show two different approaches on how cryptographic tokens could be regulated in the US.

SEC Halts AriseBank ICO

The U.S. Securities and Exchange Commission judicially obtained an order to halt the ICO of AriseBank, claiming to be “the world’s first decentralized bank.” The SEC defined that the project had purposely targeted retail investors via social media, celebrity endorsement, and other dissemination tactics to raise the ICO goal of $1 billion in two months. At the time of filing a complaint on January 25th, 2018, the SEC said that the project has already attracted $600 million of investment funds and intended to reach $1 billion.

After accusing AriseBank of fraud, the SEC has frozen the company’s bank accounts in Dallas, Texas, including digital assets in Bitcoin, Litecoin, Bitshares, Dogecoin, and BitUSD, according to the SEC statement.

AriseBank founders Jared Rice and Stanley Ford advertised the project as the first decentralized bank offering a large number of services and supporting approximately 700 cryptocurrencies. The founders also claimed that AriseBank had developed an application for algorithmic cryptocurrency trading.

It’s noteworthy that one of the people who advertised the project was the famous boxer, Evander Holyfield.

The main SEC allegations concerning AriseBank includes fraud with unregistered securities, as well as misleading users and investors about cooperation with the Federal Deposit Insurance Corporation and the opportunity to get a VISA card to simplify cryptocurrency payments. In addition, according to the SEC, the AriseBank founders have hidden their criminal past.

The Securities and Exchange Commission encouraged investors who suffered from AriseBank actions to apply to the financial controller to submit a complaint. AriseBank representatives asserted that they are going to defend their interests in the court.

It’s not the first time that the SEC halted an ICO. In August 2017, the SEC shut down the Munchee ICO due to securities laws violations as the agency defined Munchee’s tokens as securities. Obviously, legislation should be more precise in defining whether tokens are securities or not.

The Bill Exempting Tokens from Securities Laws

On January 30th, 2018, twelve Wyoming representatives and senators introduced Bill No. HB0070, declaring that “blockchain tokens aren’t subject to the specified securities and money transmission laws.”

Representative Tyler Lindholm, a Republican member of the Wyoming House of Representatives, said that:

“Wyoming is stepping up to welcome the blockchain community with open arms. We view non-securities blockchain tokens as a new asset class that is neither money nor securities, and therefore believe existing money transmitter and securities regulations should not apply.”

The bill states a definition of an “open blockchain token.” Under the bill, an open blockchain token is:

Сreated in response to the verification or collection of a specified number of transactions relating to a digital ledger or database; (b) based on the random selection or the possession or age of existing units; also, it has to be (c) created using any combinations of the methods specified above. Кecorded in a digital ledger or database which chronological, consensus-based, decentralized and mathematically verified in nature, especially relating to the supply of units and their distribution. Сapable of being traded or transferred between persons without an intermediary or custodian of value.

The bill states that securities laws shouldn’t apply if the token has a utility. Thus, the state of Wyoming defined what is, in fact, a token, making a significant step forward in token regulation.

Many enthusiasts and entrepreneurs think that, in most cases, blockchain tokens are just a simple prepayment for software licenses. Therefore, if tradable gift cards and prepaid cell phone minutes are not regulated as money or securities, prepaid software licenses shouldn’t be subject to these laws as well.

According to paragraph 17-4-206 of the bill, an issuer of open blockchain tokens won’t be qualified as a securities issuer and won’t be subject to the state of Wyoming securities laws if:

The token hasn’t been marketed as an investment. The token is tradable for goods or services. The issuer hasn’t entered a repurchase agreement of any kind or entered an agreement to locate a buyer for the token.

Thereby, if a blockchain project clearly defines its token as a (1) utility token that (2) gives access to services within the platform and (3) the project won’t repurchase tokens in the future OR the project hasn’t clearly defined the buyer of tokens, then tokens won’t be defined as securities. Said requirements aren’t strict. Thereby, if the Bill gets passed, Wyoming may become a new popular destination for ICOs and blockchain-related projects.

The bill also states that a person conducting an exchange of “open blockchain tokens” won’t be deemed a “broker-dealer,” which means that the securities laws won’t apply.

Conclusion

The Wyoming bill may become the first cryptocurrency law in the world to provide a clear definition of a token. Moreover, it may be the first law to give ICOs somewhat of a shield from the securities regulation, encouraging projects to conduct ICOs. What is even more important is that this case can show other jurisdictions and authorities how to treat tokens.

Anyway, the last word will be for the US Congress, which may either support the Wyoming legislators’ approach by passing a similar law or take an opposite position in favor of federal authorities and the SEC.





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