ICO craze over? SEC Rules Digital Tokens are SecuritiessteemCreated with Sketch.

SEC on ICO's.png

Yesterday, the Securities and Exchange Commission (SEC) ruled that "coins" that were used in The DAO Initial Coin Offering (ICO) were in fact securities, which means they fall under federal investment laws. This comes amidst while dozens of companies have completed, are in the process, or will be raising millions of dollars through the ICO process. The SEC investigated The DAO (Decentralized Autonomous Oraganization) ICO over the debacle it had where hackers stole over $7 million in Ethereum during the ICO. Though the SEC said it would not bring charges against those involved "given the facts and circumstances."

What does this mean for current and future ICOs?

Many people in the crypto community knew this was coming eventually, since government is always way behind technology and takes a while to catch up. If you have ever participated in an ICO, you will notice that many state that if you are a U.S. citizen you cannot participate (check image below). They also state clearly that what you are purchasing is just a token and in no way is a security, and are used to give users access to the network. This is for the developers to protect themselves against legal action from U.S. citizens via the SEC. Anyone with any knowledge on the internet knows this is easily by passable by changing your IP address. Though as many know, these tokens are traded in secondary markets and are speculated highly upon. As for ICO's future, this will definitely put many in check now that the SEC will slowly be pushing their way into the cryptocurrency space.

Below is a classic example of an ICO forbidding U.S. citizens, this one from Adshares, a blockchain platform trying to revolutionize advertising.

Adshare ICO.png

Surprisingly, this did not effect the cryptocurency market prices as some suspected. Though this may change if the SEC gets more invasive in the cryptocurrency markets and ICO process. Emin Gun Sirer, a Cornell University professor stated following the SEC remarks that this ruling could have a detrimental impact on cryptocurrency market and could collapse The DAO. Though he said that it is likely to bring a new, more tempered era of industry development, that will foster long term development and improvement of blockchain technology. This in turn means the public is recognizing blockchain as a financial instruments equivalent to traditional ones.

Emin was also a public critic of The DAO project before the hack occured, pointing out it's flaws. In the article they discuss how The DAO's voting mechanism is designed to incentivize investors, but it is at odds with truthful voting. Here is a quote to from the article explaining the voting mechanism:

"The central point of the DAO is to enable token holders to vote on proposals. Every proposal has a clear present cost, specified in the proposal itself. It returns value to the shareholders either through an expected profit denominated in ether and paid back to The DAO, or through the implicit appreciation of the The Dao Tokens (TDTs). As with every investment, proposals to the DAO have a probability of success that depends on the nature of the venture and its business plan. For instance, a proposal may ask for 1000 Ether to make 1000 T-Shirts, and may estimate that they will sell them for 1.5 Ether each, to yield a total profit of 500 Ether over a few months, and thus estimate they will return 1500 Ether to The DAO."

If you want to read more about the attacks and issues click here.

ICO's have been so popular lately, companies like EOS was valued at $232.6 million, Tezos at $232 million, and Bancor at $147 million. What do all three of these have in common, they don't have a working product (Bancor has a demo, that can barely be considered an Alpha). Now I'm not saying these three don't offer great ideas, but there's just no subsistence there yet. Just cause it's a good idea on paper, doesn't mean it will work once you try to make it a product.

In one of my previous articles I discussed how this ICO craze is similar to the IPO craze of the dot.com bubble of the late 1990's. Though the other day, I saw someone make a valid comment on an article, how what we are going through in the cryptocurrency market is more like the beginning of the stock market formation. No regulation, little oversight, it's like the Wild West out there.

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Definitely agree with the Wild West sentiment haha.

I'm of the opinion that this ruling should generally be good for the longevity and institutional adoption of Ethereum.

I say that because if ICOs continued to operate with very little accountability, we would inevitably see an increasing number of catastrophes in the ICO space (e.g. Veritaseum hack, CoinDash hack, etc.) - which can significantly hurt investor confidence in the Ethereum platform.

With all that being said though, it's a bittersweet moment because the Wild West mentality is really what makes crypto so amazing... and profitable - we're all pioneers in a completely brand new space.

I guess that's just part of growing up. 😢

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It's a bubble destine to burst. The day people realized these companies aren't coming to fruition with their promises you will see coins crash hard. Since this isn't the stock market, there is no plug they pull, like they did with Facebook after it's IPO in 2012 where it tanked more than 30% in one day and they pulled the plug.

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Yeah, I totally agree. You have to figure an overwhelming number of them will fail - I mean just look at the statistics surrounding new businesses - over 50% of them fail within the first four years. And they aren't in a space that's nearly as violent as crypto.

And considering how much money has been thrown at these ICOs and their subsequent trading - it's going to a significant burst.

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Very true, but that time is way down the line, crypto's are just getting mainstream, so it's going to go up hard and fast and then plummet.