Big money venture capitalists and law firms met in secret, roughly a month ago, with the US Securities and Exchange Commission (SEC), according to two major media outlets. The SEC has been particularly active this year, causing those with interest in pet coins and projects to lobby the agency for special protection. Top of the list was a push to provide “safe harbor” for Ethereum.
Big Money Lobbies for Ethereum in Secret
Andreessen Horowitz, Union Square Ventures, along with powerhouse law firms Cooley, Perkins Coie, and McDermott Will & Emery, formed an ad hoc association, the Venture Capital Working Group. It appears to exist in an effort to influence what some see as inevitable, regulation. Almost weekly, the SEC has made noise about cryptocurrencies in one form or another, and the broader ecosystem continues to debate whether to go further underground or embrace government intervention.
Online political journal Politico broke the story, insisting a “group of venture capital firms with investments in digital currency-related companies has asked the SEC for a safe harbor from securities laws for certain projects.” Perkins evidently led the effort, flooding the SEC with a nearly 50 page note. The note “argues that while certain digital tokens sold to select investors before wider availability may qualify as securities, they should be granted protection from regulations once they are used for a non-investment purpose.”
It has been long thought if the SEC were to overtly designate a cryptocurrency coin or token a “security,” the weight of legal implications alone would probably kill it. Compliance would necessarily mean hoards of expensive lawyers, etc. The working group, therefore, wished to get ahead of that possible future by proposing safe harbor for some coins they feel are objectively not securities, hoping to secure what Politico refers to as “no action letters.”
Chief among the working group’s concern, evidently, is the second most popular cryptocurrency by market capitalization, Ethereum. Ether, the group’s plea to the SEC reads, “is a good example of this type of protocol token that has become so decentralized it should not be deemed a Security.” Saddling ether with the “security” tag, again, might sideline a great many future projects built on top of its network. Presumably, these are present and future companies the working group has heavily invested in.
Regulations for Thee, Not for Me
“Though many digital currencies run off code related to the Ethereum network that uses ether,” Politico was keen to point out, “the working group does not believe the safe harbor would necessarily apply to those tokens.” The key, then, just might be in what the term “decentralization” means, going forward. The document insists, “To remedy the uncertainty and confusion in this space, we are proposing a non-exclusive safe harbor to help provide guidance to the industry on what constitutes an ‘investment contract’ and how the investment contract law and guidance should apply to utility tokens.”
Ethereum has been credited/blamed for the boom in crowdfunding popularized with initial coin offerings, ICOs. The easy onboarding of ICOs has fueled a boom throughout most of 2017, and there appears to be little let up going into the second financial quarter. The SEC is on record as stating ICOs, to a project, are all securities, and so fall under the agency’s jurisdiction.
“Under the terms of the safe harbor,” Politico continues, “digital currencies would not be subject to securities law, including the so-called Howey test, once they achieve certain benchmarks centered on blockchain software functions. Pre-sales of tokens would continue to fall under securities law.”
The group, comprised of the two biggest venture capital funds within the ecosystem, “met with the S.E.C. in Washington on March 28 to present their idea for a safe harbor that would allow some tokens to be categorized as ‘utility tokens’ rather than securities,” according to the New York Times, who picked up the story a day later. Whereas coins such as bitcoin cash (BCH) did not arise from an ICO and have no central organizing body, they appear to be safe and sufficiently “decentralized.” Ethereum, however, is another matter altogether. It did sell ether initially through a primitive form of an early ICO. As of this writing, there is no word as to whether the SEC accepted the group’s definitions and requests.
Do you think it’s time for the ecosystem to embrace regulation? Let us know in the comments section below.
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Author: C. Edward Kelso