The securities industry has been discussing the potential risks of digital tokens for years. Now, the chairman of the U.S. Securities and Exchange Commission (SEC) has officially weighed in with his opinion on this matter.
While many have been waiting for his official stance, he did not disappoint. In a speech delivered at Yahoo Finance’s All Markets Summit this past Thursday, Chairman Jay Clayton spoke about digital assets, specifically bitcoin and Ethereum.
In his speech, Chairman Clayton stated: Crypto is a digital standard that enables companies to raise capital from non-accredited investors without going public or getting an investment license.
It is a new kind of asset class that will continue to evolve as more traditional and non-traditional investors start investing in crypto markets.
Bitcoin and Ethereum Are Commodities
The chairman of the SEC, Jay Clayton, has officially stated that both bitcoin and Ethereum are commodities. In particular, he said that both are “virtual items” that are “not securities” and “not currency.”
While he did not go into detail about the difference between a commodity and security, Mr. Clayton did refer to bitcoin as “more like a commodity than a currency” and said that Ethereum “certainly is more like a commodity than a token.”
The chairman also spoke about the difference between crypto assets and ICOs. He said that ICOs present the same kind of financial risk as venture capital investments.
However, he also pointed out that the SEC recently issued an ICO advisory, so he recognizes the potential dangers of this fundraising vehicle.
Furthermore, Mr. Clayton said that he hopes that the regulators will work with the crypto industry to find a balance between fraud prevention and fostering innovation.
SEC Chairman Speaks on ICOs
Speaking about ICOs, Jay Clayton said that these digital token-based fundraizations are similar to an initial public offering (IPO). However, he sees them as a different form of equity, as these ICOs are often decentralized or non-equity in nature.
The chairman mentioned that some ICOs even use the blockchain to provide an alternative to equity ownership. Mr. Clayton spoke about how tokens can be securities and said that “even if the sales of tokens are not accompanied by sales or other promotional materials, or are conducted outside of regulated exchanges, they may still be subject to SEC regulation” if they are considered securities.
Moreover, Mr. Clayton stated that the tokens could be “equally subject to regulation as tradable commodities.”
SEC Chairman Speaks on Tokenized Securities
Mr. Clayton also mentioned the distinction between tokenized securities and tokens that are considered commodities. He said that asset-backed tokens (e.g. those that represent debt or equity in a company) do not fall under federal securities laws and are therefore not securities.
The chairman spoke about the “significant investor protection benefits of asset-backed tokens,” including the ability to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
However, Mr. Clayton also said that “other types of tokens could be outside of federal securities laws if they are more like commodities.”
He noted that these tokens would fall under federal commodity laws and would therefore be based on a product that is not equity.
SEC Chairman Speaks on Distinguishing Tokens From Securities
Mr. Clayton also spoke about the distinction between tokens that are considered securities and those that are not.
The chairman said that tokens that fall under federal securities laws should be registered with the SEC or be subject to state securities regulations. For example, tokens issued as security offerings could be considered securities by the SEC.
However, Mr. Clayton also said that “some tokens, such as those used for trading on secondary markets, do not implicate federal securities laws.”
He noted that the tokens could be considered securities under state or local law. For example, some tokens may be considered securities under securities laws of the relevant state.
In his speech, Chairman Jay Clayton stated that “Bitcoin is not an investment for most people,” and that most investors should not invest in it.
He also mentioned that both bitcoin and Ethereum are commodities and that ICOs are similar to venture capital investments. Lastly, Mr. Clayton said that while some tokenized securities are not securities, others could be under different regulatory regimes.