All Altcoins are Securities?

[kaopxa]

The crypto community is highly divided on whether tokens issued during ICOs are securities or not. The argument tends to center the Howey Test and the legal definition of what a security is when compared to the purported “utility” of the token being sold. As a refresher, a transaction is an investment if:

• It is an investment of money
• There is an expectation of profits from the investment
• The investment of money is in a common enterprise
• Any profit comes from the efforts of a promoter or third party*

The pro-securities side says that if the token can be bought with the expectation of selling at a higher price, it will be treated like a security. Those on the other side say that ICOs are conceptually identical to crowdfunding, where people purchase early access to a platform. The fact that the price increases on the open market is merely a byproduct of supply and demand economics.

But the second camp follows a very dangerous line of thinking.

ICO ≠ Crowdfunding

The strongest argument for ICOs being spiritual opposites from crowdfunding is the fact that ICOs are designed to create value through scarcity. This is the reason crowdfunding campaigns set minimum levels while ICOs set maximums.

To illustrate: when you are supporting a drone company via crowdfunding, you can rightly expect to receive one of their products in the future as reward for your contribution. But you are paying for them to increase their output and sell more drones which are identical to yours. In this way, your money actually devalues the individual asset. But ICO investment… ahem… “contribution” is a zero sum game. For every token you don’t get, someone else does. If it is truly a utility for everyone to use, it begs the question of why companies would want a limit on coins.

The Howey Test asserts that “courts look at the economic realities behind an investment scheme, rather than at its name or form,*” which brings me to my next point:

Why would you ignore the worst case scenario?

Only time will tell how the courts are going to rule. But from a community that is largely rooted in agile software development, there seems to be a notable lack of assumptions testing. Buildings have earthquake resistance, cars have seatbelts, and people have health insurance not because they expect to experience earthquakes or crashes or accidents every day, but just in case. What is the point in charging ahead insisting the black swan of regulation could not happen?

Now for the most dangerous part: all the arguments I have seen assume that regulators are completely neutral parties. In reality, regulators have more skin in this game than most of the crypto community combined. It represents reputation for them: each and every scam where honest people lose money is because of their inaction. More importantly, it represents revenue: a regulated asset is a taxable one, and the growing $500b crypto market is looking like a lot of assets. Never underestimate the power of regulators — they have done things from coercing Apple to hand over encryption keys to making Mark Zuckerberg testify in front of Congress.

*Courtesy of findlaw.com

What do you guys think?

[Crown1]

Now the SEC has decided that ETH is not a security.
However, ETH is part of altcoin, so I am optimistic about whether altcoin is a security.

[kaopxa]

That's a good point, but I think even ETH only passed the Howey test because there was sufficient time between its ICO (and subsequent hardfork) and the actual hearing. If you looked at it at immediate time of raise, things get a little more blurry.

Another thing it has going for it is that it legitimately has use as gas for all ERC-xx/xxx's, while maintaining an inflationary model which means aggregate value increase doesn't have to be the result of each individual token becoming worth more. Other tokens that sell based on scarcity/fixed mint will have trouble passing the same test.

[malweyer]

most are, yeah. for it not to be a security there would prbably have to be a price cap/token, therefore a maximum appreciation. that way its more like selling a coupon (i.e. 65% discount on future transactions) than selling a stock (price increase with success of company).

i think OMG does this, but dont know many others off the top of my head.

[kaopxa]

OMG obviously doesn't have a price cap... But I get where you're coming from that you can use it for discounted tx when the OMGDEX is open. Even so, tough telling regulators that you raised $25m off people believing they were going to be getting cheaper trades.

[I.P. Freely]

This uncertainty is why I'm so comfy holding AMB. It's a clear-as-day utility token and the team even went to great lengths to achieve full regulatory compliance, even being one of the very first ICO's to perform KYC on investors.

[deloreswest]

Now the SEC has decided that ETH is not a security.
However, ETH is part of altcoin, so I am optimistic about whether altcoin is a security.

i dont think eth is securitiy i believe last week we got a news that they deny crypto are security and it can be regulated as security. Meanwhile in korea they consider bitcoin as an asset. Maybe we need more time to determine what crypto is

[malweyer]

Now the SEC has decided that ETH is not a security.
However, ETH is part of altcoin, so I am optimistic about whether altcoin is a security.

i dont think eth is securitiy i believe last week we got a news that they deny crypto are security and it can be regulated as security. Meanwhile in korea they consider bitcoin as an asset. Maybe we need more time to determine what crypto is

its true the line between "security" and "collectible" can be pretty thin in these cases. but actually regulations can be a good thing. less scam icos, more dd for teams, less dumb money funding projects that have no clear revenue strategy

[kaopxa]

What do you mean "collectible"? Like a Beanie Baby? The thing is, if people decided to use Beanie Babies as currency (which was very close for a while in the 90's), then the gov't would have shut it down because there was only one issuer. If the same happens with Bitcoin, there is nothing to crack down on. But ETH and Vitalik, or XRP and Ripple Co, or any other ERC alt and the founders of those companies seems to be a different story.

[Hueristic]

...

What do you guys think?

I think lawyers suck donkey dicks and the Securities and Exchange Commission should fuck off.

But then again they don't really care what we think do they?

[pheonyx]

Not all altcoins because some are purposely created to steal your money. This is a security on the sides of the scammers so let us always be careful.

[Tipstar]

ICO are equivalent to IPO of stocks. The funded money is used to build the product.
You hold token as a share. You buy and sell speculating the value.
And the POS or holders airdrop is bonus shares in term of securities.
Coin burning is dividend, as the give you back money.

[kaopxa]

ICO are equivalent to IPO of stocks. The funded money is used to build the product.
You hold token as a share. You buy and sell speculating the value.
And the POS or holders airdrop is bonus shares in term of securities.
Coin burning is dividend, as the give you back money.

So you're saying it is a security? But they are definitely not stocks. Most companies (except the ones working with Polymath or some other security tokenization protocol) are very insistent that the tokens don't carry any voting, governance, or disclosure rights.

[malweyer]

...

What do you guys think?

I think lawyers suck donkey dicks and the Securities and Exchange Commission should fuck off.

But then again they don't really care what we think do they?

true. but the reality is they have power so we should care what they think. the sooner everyone gets on the same page regulation-wise the sooner we dont have to have conversations like this

[Ariem]

ICO tokens do not fit in any one of the existing terms, so they need to come up with a new one, because they are programmable, and at any time they can be reprogrammed and their properties can be changed.

[kaopxa]

ICO tokens do not fit in any one of the existing terms, so they need to come up with a new one, because they are programmable, and at any time they can be reprogrammed and their properties can be changed.

I'm not convinced by this - isn't the point of tokens/blockchain that they aren't supposed to be reprogrammed?

[Lab_Rat]

I don't see anything common between cryptocurrency and securities. Cryptocurrency is not dependent on the financial performance of any company. The Cryptocurrency does not give investors any rights. Maybe some tokens might look like securities, but it's more like an exception.

[malweyer]

I don't see anything common between cryptocurrency and securities. Cryptocurrency is not dependent on the financial performance of any company. The Cryptocurrency does not give investors any rights. Maybe some tokens might look like securities, but it's more like an exception.

then how can you reconcile that with the fact that they are marketed as things that gain value proportionate to a company's success?

[malweyer]

I don't see anything common between cryptocurrency and securities. Cryptocurrency is not dependent on the financial performance of any company. The Cryptocurrency does not give investors any rights. Maybe some tokens might look like securities, but it's more like an exception.

howey test:
>'there is expectation of profits from the investment'
...
what cryptocurrency trader is buying tokens without expecting profit?

[Anniee123]

At the moment, I think most ICO's are securities.
Because ICO's fundraisers are all one company, you're essentially just investing in the company to get a long-term return.