Will Virtual Currencies Get a "Safe Harbor"?

Virtual Currencies, Manhattan skylineSome venture capitalists (VCs) and entrepreneurs are lobbying federal regulators so that virtual currencies won't be classified as securities.

As I discussed in this blog, bitcoin is the best-known and most popular virtual currency, but it's far form the only one. Hundreds of new virtual currencies are being launched every month, often via a process called an "initial coin offering" (ICO).

White Papers

An ICO is usually marketed via a document (called a "white paper) that's supposed to explain how the virtual currency will work and why it's being issued.

Many white papers are written (intentionally or not) in a way that most potential investors will find incomprehensible.   

The federal Securities Act  and Securities Exchange Act regulate securities.

But what's a "security"? And do virtual currencies qualify?


To determine whether something is a security, the US Securities and Exchange Commission (SEC) applies what's called the Howey Test. Under this test, an offering is a security if:

  1. It's an investment of money
  2. There's an expectation of profits from the investment
  3. The investment of money is in a common enterprise
  4. Any profit comes from the efforts of a promoter or third party

To the surprise of many in the cryptocurrency field, almost all ICO's are considered securities.

Shock and Surprise

According to the Wilson Sonsini law firm,

There apparently has been significant shock and surprise over recent reports that the Securities and Exchange Commission (SEC) has issued a large number of subpoenas to initial coin offering (ICO) issuers and to ICO gatekeepers who may have been involved in token transactions that potentially did not comply with the federal securities laws. To a large extent, this shock and surprise is shocking and surprising. The SEC has been as clear as it knows how to be that it believes virtually all tokens (and simple agreements for future tokens, or SAFTs) are securities for purposes of the federal securities laws.

Safe Harbor

As reported by the New York Times, VCs and entrepreneurs are trying to create a "safe harbor" for some virtual currencies — free of SEC regulation.

The “Venture Capital Working Group” met with the SEC in Washington in March. The Group seeks to have some virtual currency tokens categorized as "utility tokens" rather than securities.

As the Times explains,

Thousands of virtual currencies have been created through so-called initial coin offerings in which entrepreneurs sold digital tokens to raise money for their projects. The tokens are generally intended to serve as internal payment methods in software that the entrepreneurs are building.

Silicon Valley

For example, such tokens were a plot point in the most recent series of the HBO series Silicon Valley.

Entrepreneurs have raised more than $6 billion using ICOs, the Times reports.

The tokens, or coins, are mostly traded on unregulated virtual exchanges.

The chairman of the SEC has said that he believes that almost all ICOs should be registered as securities, but almost none are at the moment.

If an ICO is considered a security, then rather than merely sharing the opaque technobabble in many white papers, issuers will need to comply with federal disclosure requirements.

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