In July, I started looking into the Decision that the DAO ICO is a Security, according to the Securities Exchange Act of 1934. Because of that decision, a lot of fear and insecurity has resulted.
"The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us," said SEC Chairman Jay Clayton. "We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected." (sec.gov - What We Do)
However, the "Know Your Customer" rule is a pretty tough pill to swallow if you've come to crypto to enjoy some anonymity.
"FINRA's Know Your Customer Rule (FINRA Rule 2090) may also cause firms to ask questions to open and service your account. In addition, the SEC requires firms to attempt to obtain a customer’s name, tax identification number, address, telephone number, date of birth, employment status, annual income, net worth (excluding primary residence), and investment objectives regarding certain accounts. Firms also are required to put procedures in place to verify the identity of any person seeking to open an account. Before opening an account, a firm must obtain, at a minimum, the name, date of birth, address and identification number (for example, a social security number) of a customer."(from finra.org - what investors need to know.)
Close to where I started this journey was an article by @lukestokes: Are all ICOs now officially securities according to the SEC?
He lays out much of the relevant information, and asks the question "What do you think?" I did a bunch of research, hoping to find a well thought out response to that question, but I didn't find anything to my satisfaction. So I've collected all of the information I found, and put it here with my thoughts.
"We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected." -SEC Chairman Jay Clayton.
...
In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants: the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology. (from: Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO)
I can't say that I trust the SEC further than I can throw them (not very far). I can say, that this is a pretty gentle response that shows that the SEC is not, like China, trying to ban all crypto. Of course, they want a slice of the pie. The guidline for determining where they can begin thier smash and grab operation is the Securities Exchange Act of 1934. Although antiquated, this does show some restraint.
They don't, immediately, try to come up with a new law to deal with crypto. Instead we get handed a tried and tested piece of legislation. There is a basic standard for determining whether to consider something a security or not based upon a 1946 Supreme Court case SEC v. Howey.
Under the Howey Test, a transaction is an investment contract if:
- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
Although the Howey Test uses the term "money," later cases have expanded this to include investments of assets other than money. The term "common enterprise" isn't precisely defined, and courts have used different interpretations. Most federal courts define a common enterprise as one that is horizontal, meaning that investors pool their money or assets together to invest in a project. However, other courts use different definitions.
The final factor of the Howey Test concerns whether any profit that comes from the investment is largely or wholly outside of the investor's control. If so, then the investment might be a security. If, however, the investor's own actions largely dictate whether an investment will be profitable, then that investment is probably not a security. (from: What is the Howey Test? emphasis mine)
As far as STEEM is concerned we pass the first 3 questions, but the 4th is where we don't seem to fit the mold of a security. Mind you, I'm not a legal expert by any means, so you'll have to make your own judgement.
There are some people who invest in Steem who profit primarily by the efforts of others. However, the bulk of Steemizens stand to profit primarily by our own efforts.
Here is a section from the recently released: "Steem Blue Paper"
"Steem provides a scalable blockchain protocol for publicly accessible and immutable content, along with a fast and fee-less digital token (called STEEM)2 which enables people to earn the currency by using their brain (what can be called “Proof-of-Brain”). The two building blocks of this protocol, both blockchain and token, depend on each other for security, immutability and longevity, and are therefore integral to each others’ existence. Steem has been successfully operating for over a year, and has now exceeded both Bitcoin and Ethereum in number of transactions processed.
...
In the field of crypto-currencies, the unique properties of STEEM make it both “smart” and “social”compared to others, such as bitcoin and ether. This stems from two new token features. The first is a pool of tokens dedicated to incentivizing content creation and curation (called the “rewards pool”). The second is a voting system that leverages the wisdom of the crowd to assess the value of content and distribute tokens to it. These two unique properties when combined are referred to as Proof-of-Brain, which is an entendre based on Proof-of-Work, meant to emphasize the human work required to distribute tokens to community participants. Proof-of-Brain positions STEEM as a tool for building perpetually growing communities, which encourage their members to add value to the community through the built in rewards structure.
I can only guess that the recent ruling by the SEC was kept in mind as the Blue Paper was written.
Our investment into this platform increases our ability to interact with it and direct it's future. However it is primarily by our own efforts, as a community, that decide how much profit we stand to gain here.
My conclusion is that Steem is fairly safe from the SEC for now. There are many other ICO's out there which pass the Howey Test with flying colours, and are likely to find themselves in the cross-hairs sooner than we will.
Of interest in this discussion is the following article:
How to Launch a Crypto Currency Legally by @Dan Larimer
The strategy I present below attempts to error on the conservative side on how to launch a crypto currency without becoming an administrator or money transmitter or exchanger. In other words, it may be possible to violate my rules while still complying with the law in certain circumstances.
Here is the readers digest version:
- Do not pre-allocate any currency to yourself or others.
- Do not sell currency directly to others.
- Aways sell through a regulated exchange.
- Complete the currency and protocol prior to launch.
- Never promise to do anything for the currency.
...
There are no easy answers in this space and everything could change in an instant with a fresh interpretation of the rules by our unelected bureaucratic overlords. (From: How to Launch a Crypto Currency Legally by @Dan Larimer)
This shows both due diligence, as well as the lack of any real answers until we hear more from the SEC. Some of the activities involved with STEEM very likely could fit within the strictures of the Howey Test, but how the SEC decides to deal with us is yet to be revealed.
For now, Have Fun, and Steem On.
I'd be happy to hear your thoughts on the matter, and feel free to drop any relevant links in the comments section.
References:
- finra.org - What investors Need to Know
- finra.org - Know Your Customer
- @lukestokes Are all ICOs now officially securities according to the SEC?
- sec.gov - What We Do
- sec.gov - SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities
- consumer.findlaw.com - What is the Howey Test?
- How to Launch a Crypto Currency Legally by @Dan Larimer
(this really cool article includes a recommended reading list by @dan.) - @steemitblog - Announcing the Steem Bluepaper
- Steem Blue Paper (Required Reading)
Further Reading
- caselaw.lp.findlaw.com - SEC v. Howey
- irs.gov - IRS Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes
- sec.gov - Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934:
The DAO - sec.gov - Ponzi schemes Using virtual Currencies
- investor.gov - INVESTOR ALERT: BITCOIN AND OTHER VIRTUAL CURRENCY-RELATED INVESTMENTS
- news.21.co - Thoughts on Tokens
- forbes.com - Digital Coins And Tokens Are Just Another Kind Of Security
- vanbex.com - Security or not a Security. A crucial regulatory question
Thanks for reading. From "The Inquiring Times" #newsteem
Join us in the SteemitBC Discord Server
Great write up! I agree with your perspectives, and I'm glad you linked to Dan's post as well. That's one I remember referencing often early on as people tried to say Steemit is a scam.
Another related post you might find interesting: Will We See a New Version of 1933's Executive Order 6102?
It highlights a very real concern we should have in that governments... are not rational actors. They pretend to act for the benefits of their "members" or "citizens" (or, as I prefer, "tax slaves"), but often the results of their actions show they are about maintaining monopoly control on systems of power, such as money creation and value itself.
I mention that post because whatever we come up with today for rational arguments for or against what the SEC might do in the future is, unfortunately, at the whim of those with a monopoly on the use of force. They get to change the rules whenever they want and we have, practically speaking, very little say so in the process.
they make the rules, but prohibition encourages growth of the "black market". So, it's up to them if they want to make their money by fighting crypto, or by working with it. It's not going to be entirely pretty either way. Crypto is here to stay. It will have value regardless of what the sec decides.
Mainly, it means that if the sec decides you are a security, you can't exchange your token on the american market without registering. This will add on a bunch of regulations most cryptos probably don't want to be a part of. First and foremost that you have to have detailed knowledge about everyone who invests with you, when offering a security in the united states.
However, I believe the end user would still be able to function, even if SEC names Steem a security. The problem is that it would be a lot more difficult for American investors, and for Americans who want to get their Steem exchanged.
related post: https://steemit.com/bitcoin/@mooncryption/breaking-news-sec-planning-creation-of-cyber-unit-with-ico-oversight
@lukestokes how can somebody ever said that STEEMIT could be a scam. How stupid the person needs to be, or similar as what Jamie from JP Morgan mentioned Bitcoin is a fraud. Perhaps that person wanted steemit to crash because he wanted other platforms to succeed. In any case I believe STEEMIT is one of the best cryptocurrencies and blockchain platform out there, and it is very close to climb a lot. Like @jerrybanfield mentions often, it will go 10x and then 100x and so on. Perhaps in 6 months or an year we are surprised on how big it has grown. Thansk for sharing this info about the SEC @inquiringtimes , my believe is that there are lots of other cryptos they will look at first that coming to this one. What do you think. Just upvoted your comment, and also the post. @gold84
Great info here!
Great article, with plenty of information on how the SEC may affect the cryptocurrency space in the future and also how Steem may pass through, as it does not pass all the requirements to be considered an investment contract.
I wonder if (applying the Howey Test to Steem/Steemit) if the creator/curator fits the criteria for the 4th category, given that's basically how profits are generated by non-investors... Just a thought.
After reading the article by @lukestokes, (about all ICO's qualifying as securities) two things come to mind... On one hand all ICO's are a means of investing- therefore fit the mold so to speak. However, almost all ICO's are structured differently, so it's difficult to judge them all together- they have to be looked at individually. Having said that ad given my experience with how governments operate (poorly and corruptly at best) I can say with relative certainty, that they will undoubtedly lump them together.
Well, the argument for steem is good. However when the SEC does things its usually a blanket proposition at which point steem will have to show/prove it doesn't fit the distinction before getting lumped in with all the "securities."
Interesting times coming down the road for sure.
No clue, but I did buy my first STEEM today, buying and transferring BTC from Coinbase to Blocktrades (-:
I just bought a little last night, myself
well done (-:
We should self regulate; then the SEC could go away. If a bunch of people used STEEMIT to publish wall-street like reports on the ico's and crypto currency, and we got a small group to decide and publish a ranking; the industry could tell ordinary people only invest in highly rated investments (at your own risk of course). Steemit would be the perfect place to collaborate with a small group of experts to publish sound research and become the standard for analyzing the industry. In true decentralized fashion, every person, or group that want to rate could do so and they could compete. (like wall street analysts do today)
I like your idea, however I don't think the sec is going to let go that easily
No. But the SEC as a Government body has to deal with bad investors; if you can run an organization without causing problems you can run under the radar. (airBnb; and Uber did this; They solved all the normal bad problems (houses getting trashed, unhappy customers, cabs overcharging people or saftey related). The SEC is slow, we can be fast. If we can make the problem go away before they do anything; it is that much better for us...
yes! I like your line of thinking!
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In fact, if you only invest in Steem, your holdings are guaranteed to be diluted by inflation. I could imagine that fact could be of interest regarding the classification of Steem.
I agree with your assessment. #4 in particular would not seem to apply to Steem in the absence of some sort of judgment to the contrary.
well, it might apply to some particular portions of this community. Despite what some have commented in this post, I do not think that the SEC will apply a blanket statement to the issue. Because they have made it clear that the howey test shall be applied to crypto. If I do not pass, stay off my cash! ;-)
I would agree with your assessment. They do not seem to be in a rush to "do something" the way China may be at this point...
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Great read, I've been researching ICOs, SEC, etc for a while now and have found a bunch of bits of information scattered around the web.
What I've gathered thus far is that blockchains and decentralized organizations call for an entirely new body of laws. Rather than apply an antiquated law to present technology, they're going to have to redefine what a security is. I do think that because of their "light" response to cryptos thus far, they're open to the possibilities of new laws being enacted. We'll just have to wait and see though.
For now, I think everyone should feel safe using whatever platforms they choose. As much as any government may want to kill crypto, it's impossible.
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Great article. Thank you for the info
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STOPWith respect, I think your analysis is wrong. The fact that you earn the tokens from your own effort isn't the point. The question is whether in owning the tokens you are making a profit.
Steem Power and Steem Dollars (under some circumstances) earn "interest"... ie you get Steem when you hold these tokens. I would say this is a perfect example of "profit that comes from the investment largely or wholly outside of the investor's control".
And for Steem, you said it yourself "There are some people who invest in Steem who profit primarily by the efforts of others". Profit in this case is in the price appreciation experienced to date for holders of Steem.
I would therefore argue that all 3 tokens pass the Howey test and therefore come under SEC purview.
well, the folk at Steemit Inc got a legal team to deal with all of that. I'm definitely not expert level securities analyst :D It's gonna take a couple years before we see how the SEC is ultimately going to treat crypto... atm they seem to be letting the blockchain sector grow a bit before tightening down too hard on us.
Yes, I wrote to their legal team asking them about it. One week later and no reply yet. Maybe they're too busy dealing with the SEC ;)
hah, I doubt it. I had a chat with Ned once about the SEC, and he was well thought out and confident about Steems position.
I'm not sure it matters, since steemit was not an ICO. They aren't selling anything, are they? I suppose that the SEC theoretically could go after Steemit Inc, but the blockchain is run by the community, not Steemit inc. I think securities laws have more of an impact on ICO, rather than crypto in general.
Tokens are bought and sold on the open market, so... thinking about it now.. i'm not entirely sure. don't they have to be selling something to apply to Howey?
https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11
And yet, all of the exchanges that list Steem also require that listed tokens pass the Howey test (ie aren't securities).
whether they are treated as securities or not can only be answered ultimately by the SEC. Buuuuut, based on this recent speech by SEC official, steem is centralized enough to be in the running for consideration as a security.
https://www.sec.gov/news/speech/speech-hinman-061418
however, the sec is gonna go for the low hanging fruit first. Steemit Inc has a bunch of money, so the SEC is more likely to have a chat with them before just drawing charges.
I do, however, understand how they view crypto a lot better after reading the speech from Hinman.