International Regulatory Shift Could Tame Cryptocurrency Market

Klayman noted that, while “many people would advise to take a conservative view anyway” in these investments, “the more and more guidance comes out, the less and less easy it is for people with a straight face around the world to say, ‘My jurisdiction says it’s not a security; who cares about what other jurisdictions think.’”

Klayman added that early token sales may have been launched under the belief that they “might be OK where they are, but they’re pretty much flouting securities law in every jurisdiction. [That's] no longer something you can say with a straight face.”

Other countries have been known to be loosely regulated when it comes to cryptocurrency. Switzerland for example, has been touted as a cryptocurrency haven of sorts, with the city of Zug being dubbed “Crypto Valley.” Others, such as Gibraltar and Luxembourg, are known to have frameworks friendly toward cryptocurrency investment. Internationally, the market is highly speculative. Garrick Hileman, a Bitcoin expert at the Cambridge Center for Alternative Finance, told Vox that speculation was “the primary driver” of increasing bitcoin value.

Prior to SEC clarification, regulations around ICOs were precarious at best. In December, Overstock became the first company to have a fully regulated public cryptocurrency offering in the U.S. Discussing his experience with regulators, John Tabacco, co-founder of Overstock subsidiary t0, told an audience at a Morrison Foerster event, “At that time, a lot of people were trying to go around the edges: Is it crowdfunding, it’s not a security, is it a security, blah, blah, blah.”

He noted that the company used Jones Day as counsel and that he was ordered to “spend whatever needs to be spent to go straight into the front doors of the SEC, tell them what we’re doing and keep letting them tell you why you can’t do it. And then address those gaps as you go along. And then when we’re done and they have no more questions, we’re going to be the first company to do an offer.” This, he added, was why the company had the first public offering.

Speaking about the SEC’s advisory on pump-and-dump schemes, Jones Day’s Obie said, “It doesn’t surprise me that what’s happening here is there’s a regulatory effort to raise awareness about the potential in the ICO marketplace. What folks are trying to say is that laws that have existed for decades still apply, and anyone buying these coins should definitely do their due diligence. It’s not for the faint of heart at times.”

As to whether regulating ICOs as securities will have any dramatic impact on businesses, Daniel Wheeler, partner at Bryan Cave, said that, going forward, he would expect “legitimate operators” to “spend a lot of money, do it the right way. And I would think that should be a signal to investors that anyone who is not doing it that way is a boiler room pump-and-dump operation.”

Wheeler said he thinks this will lead to fewer ICOs, as the market “should understand now that doing one is just as expensive as any other security.”

— Check out Bitcoin Fork Sparks Optimism, but New Currency Has Skeptics on ThinkAdvisor.