DAO ICO and the FEC

Navigating the "regulatory" world of Cryptocurrency

 The DAO ICO raised 9 Million on its opening day, June 29th, 2017.

The DAO ICO raised 9 Million on its opening day, June 29th, 2017.

*UPDATED 10/5/17

Unless you've been sleeping under a bus, you've probably heard of cryptocurrency. This is an exciting new economic space that is just starting to receive regulatory precedent within the United States. Much like an IPO, which stands for Initial Public Offering of a company, new digital coins have something similar called an ICO, or Initial Coin Offering. The main difference between coins that function as currency, and thus a utility and not an investment, and coins that may be classified as a security, or are classified as a security (such as DAO), are considerations such as entitlement to voting rights, dividends, or other components which act like "shares". Shares being the typical equity investment one can make in companies. The SEC was designed to vet companies so they couldn't defraud investors. Governmental wheels turn slow, and in the world of crypto, some coins may end up being considered securities. One easy way to think of it is: is this coin inert (simply an investment in what may come of it) or is this coin a utility (has an application in a marketplace)? 

In the case of Bitcoin or Etherium they are both, in my understanding, utilities. For this reason they haven't received any pushback from the SEC, but rather states like New York, have been figuring out how to work them into the equation. But the recent ICO of DAO, which took place June 29th, 2017, has been classified by the SEC as a security. DAO offered both dividends and voting rights, which are traditionally seen as aspects of security investments, like owning equity in a stock, which pays out from time to time. Whereas Bitcoin and Etherium are functional and digital currencies, DAO was behaving more like a securities investment. It should be noted that the SEC are significant legal lassitude in interpreting what a security is, including adding "novel securities" as they are discovered.  

The SEC classifies as security as: 

“any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”

Here is an article that simply explains why some ICO's are considered securities. 

This is the SEC's position on DAO

In my opinion, if you are in the US and don't want to try and hide your activity, buy Bitcoin and Etherium (you can do so through a popular app like Coinbase), but steer clear of anything that offers a dividend, or serves no utilitarian function, or treats you like an investor. 

Buying cryptocurrency, as far as I can tell, is just fine. Coinbase is a simple way to procure both Bitcoin and Etherium, but the regulatory road of ICO's remains rather unprecedented, so investors in the US just may have to be patient. 

No reason you can't buy digital currencies like ETH or BTC and simply hold, if you wish to be compliant just be ready to pay capital gains tax when you sell, and keep track of your sales, so as to disclose them annually. 

Some people would rather see less regulation, and I see where they are coming from, but ultimately some degree of regulation insures people won't be defrauded, which is for their benefit. With that said, the way in which regulation is applied remains to be seen and it is possible it may reach further than it can grasp. 

[UPDATE} A closing thought, after watching this video, it appears that the inventor of DAO (beyond having to shut it down), did not get into any trouble with the SEC. 

[This is not legal, or economic advice. Consult your own advisors].