The prices of Bitcoin and Ether may be sliding, but in the cryptocurrency community, demand for tarot cards, crystal balls, and tea leaves never been higher. We imagine so, anyway, because two massive questions affecting the fate of alt-coins appear ripe for decision within the halls of government. Until those decisions come down, a lot of cryptocurrency holders will be nervously consulting their local fortune tellers.
Sure, it’s true: cryptocurrency enthusiasts have lived with regulatory uncertainty for a long time now. Since the first Bitcoin was mined, alt-coins have occupied a kind of legal netherworld that has barely been explored, much less illuminated and mapped, by the federal government. But at this point in the evolution of cryptocurrencies, we know at least two things. The first is that SEC Chairman Jay Clayton believes almost every token issued through an ICO is properly classified as a security – this despite the fact that virtually no coins are registered as such with the SEC. Second, we know that enforcing that view of the world could get pretty messy. If the SEC were to deem an individual coin a security, no exchanges could trade it (without themselves registering with the SEC), likely leading to a crash in the coin’s price. Given that more than $8 billion has already been raised through ICOs, that’s a lot of potential value lost.
These factors have helped bring two critical questions to a head:
1. Is Ether a Security?
The second-largest cryptocurrency in value, Ether is currently the subject of jurisdictional haggling between the SEC and CFTC. The CFTC previously called dibs on Bitcoin, classifying it as a commodity and agreeing to oversee derivative markets in the reigning king of cryptocurrencies. It’s an open – and extremely valuable – question as to whether or not Ether will receive that same treatment. The SEC and CFTC are currently in talks over whose umbrella covers Ether. A decision classifying Ether as a security, and placing it under the SEC’s purview, could have enormous consequences. Not only would it threaten the more than $70 billion in value that resides in Ether (as of early May), but also the huge number of ICOs that have been executed via the Ethereum platform. More than 50 percent of the ICOs in 2017 used the Ethereum blockchain.
Regulators are promising an imminent decision. CFTC Commissioner Brian Quintenz wouldn’t promise a timeline, but when asked in mid-May how far out a ruling would be, he responded: “I wouldn’t say days, but I wouldn’t say months.” In a contender for understatement of the year, he added: “The market needs some certainty.”
2. Will the SAFT Hold Up?
Aware of the problems that could result if tokens are classified as securities, the crypto community has taken some defensive measures. Perhaps unsurprisingly, the industry has done some lobbying. In addition, it has consciously tried to structure transactions in a way that avoid the “security” label. The most prominent method of doing this is using the “Simple Agreement for Future Tokens,” or SAFT, which is a variation on the Simple Agreement for Future Equity (SAFE), a now-standard vehicle for investment in start-ups. Created by tech-savvy lawyers at Cooley, the SAFT framework is designed to make the transaction work in a manner that makes it fall outside the definition of a security, as set out in the Supreme Court’s “Howey Test.” Many of the biggest ICOs have used the SAFT framework.
Does it hold up? That’s the billion dollar question. The SAFT framework could work as intended, or it could be as meaningless as the “Privileged and Confidential” notices that lawyers tack onto the bottom of their emails. Only court decisions will give us the final answer on that, but it increasingly looks like SAFT will get put to the test. In fact, while far from certain the SAFT framework could even be the subject of widespread SEC investigations. The SEC has issued scores of subpoenas to various crypto players in recent months, in what may simply be a campaign to educate itself. But there is at least some reason to believe that the agency has been conducting a targeted investigation of SAFTs.
The inevitable test of SAFT, as well as the decision on Ether, remain shoes yet to drop in the world of virtual currencies. In the meantime, we can only ask our Magic 8-Ball what the future holds.