Specific cryptocurrencies should be treated as securities
Coin Center, which is a blockchain advocacy group, continues to believe that some cryptocurrencies look like securities by law, and they should be regulated as such. The director of research of the organization, named Peter Van Valkenburgh, published a new report this Friday, arguing that specific cryptocurrencies follow the oft-cited Howey Test, and they also act as investment contracts. Being such, he said that they should be treated as securities. According to the Howey Test, there was a possible framework for regulators in determining whether any given cryptocurrency should be security.
There are three variables that the framework examines, which Van Valkenburgh thinks that are quite important for determining whether a cryptocurrency is a security: distribution, decentralization, as well as functionality. Specifically, Van Valkenburgh also says, how a token is initially distributed, how decentralized its underlying network is, as well as what powers or rights token holders have should determine whether it is a security.
Examining ICOs more closely than the original
He said that they find that more substantial, more decentralized cryptocurrencies, such as Bitcoin, pegged cryptocurrencies – i.e., sidechains – and distributed computing platforms, such as Ethereum, do not comfortably fit the definition of a security, also don’t represent the sort of consumer risk which is best addressed through securities regulation. However, he said that they do find that some smaller questionable marketed or designed cryptocurrencies may indeed fir that definition.
The new version actually examines Initial Coin Offerings or ICOs more closely than the original, maybe reflecting the fundraising method’s spike in popularity from 2017. ICOs raised about $46 million in 2016, less than one-tenth of the more than $5 billion in 2017. Also, it provides more in-depth explanations of alt-coins, as well as how they may fit into the framework.
Networks designed to empower their users
What Van Valkenburgh also noted was the rise in airdrops and ERC-20 tokens, saying that a few of the networks, most significantly Ethereum, are actually designed to empower their users, to create further bespoke tokens on the top of the parent network. He added that the minting and transmission of these new tokens, as well as their use, is policed and described by the consensus mechanism and blockchain of the underlying network.
Just like the version from previously, Van Valkenburgh outlines possible risks to investors, providing some suggestions about how to protect them without hurting innovation.