SEC Chair Jay Clayton asserted that bitcoin and other cryptocurrencies that are replacements for U.S. dollars or other sovereign (fiat) currencies do not constitute securities under federal securities laws (see Securities Act Section 2(a)(1); Exchange Act Section 3(a)(10)).
In an interview on CNBC, Mr. Clayton contrasted cryptocurrencies with other blockchain technologies, such as tokens, in which money is invested in a venture in exchange for a direct return on the token, or for the ability to earn a return by selling the token on a secondary market. These types of tokens are considered securities, and both their issuance via initial coin offerings ("ICOs") and their trading on an exchange are subject to SEC registration and oversight. Mr. Clayton said that if an unregistered ICO is to be conducted via an unregistered private placement, the SEC will expect adherence to the private placement rules.
Mr. Clayton ruled out amending the statutory definition of securities to expressly address cryptocurrencies and other blockchain technologies, saying that the SEC would not "do any violence to the traditional definition of security that has worked for a long time." He also declined to comment on whether various specific bitcoin alternatives, or "Altcoins" – such as Ethereum and Ripple – constituted securities, saying instead that the analysis of each was effectively case-specific.
When asked about the current bitcoin futures market and what criteria issuers would need to meet in order to start a bitcoin exchange-traded fund, Mr. Clayton cited guidance from the Division of Investment Management on features the SEC will look for – such as accurate pricing and asset verification – before approving any asset class.
Commentary / Joseph V. Moreno
In analyzing whether a token or other cryptocurrency technology is an "investment contract" (and thus a security subject to SEC regulation), Chair Clayton cited the "Howey Test," which derives from the Supreme Court's decision in SEC v. W.J. Howey Co. Under the Howey Test, an investment contract exists when there is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. The analysis effectively looks to whether the crypto-asset has intrinsic value and is effectively a substitute for fiat currency, or whether the value derives from the growth and success of an underlying business venture. Chair Clayton's comments were not surprising in that he confirmed the position the SEC has advocated since its action against Munchee Inc., in which it found that the company's token offering was an unregistered ICO. While Clayton indicated an open-mindedness to cryptocurrency technologies in general, and encouraged those with questions to approach the SEC for an open dialog, his comments left little doubt that the Howey Test would be applied to ICOs, and that the SEC was planning to aggressively assert its regulatory authority in this space.
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