Does the STEEM Blue Paper respond to a recent decision by the SEC to consider some Crypto-Currencies Securities?
In July, I started looking into the Decision that the DAO ICO is a Security, according to the Securities Exchange Act of 1934. Because of that decision, a lot of fear and insecurity has resulted.
"The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us," said SEC Chairman Jay Clayton. "We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected." (sec.gov - What We Do)
However, the "Know Your Customer" rule is a pretty tough pill to swallow if you've come to crypto to enjoy some anonymity.
"FINRA's Know Your Customer Rule (FINRA Rule 2090) may also cause firms to ask questions to open and service your account. In addition, the SEC requires firms to attempt to obtain a customer’s name, tax identification number, address, telephone number, date of birth, employment status, annual income, net worth (excluding primary residence), and investment objectives regarding certain accounts. Firms also are required to put procedures in place to verify the identity of any person seeking to open an account. Before opening an account, a firm must obtain, at a minimum, the name, date of birth, address and identification number (for example, a social security number) of a customer."(from finra.org - what investors need to know.)
Close to where I started this journey was an article by @lukestokes: Are all ICOs now officially securities according to the SEC?
He lays out much of the relevant information, and asks the question "What do you think?" I did a bunch of research, hoping to find a well thought out response to that question, but I didn't find anything to my satisfaction. So I've collected all of the information I found, and put it here with my thoughts.
"We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected." -SEC Chairman Jay Clayton.
In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants: the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology. (from: Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO)
I can't say that I trust the SEC further than I can throw them (not very far). I can say, that this is a pretty gentle response that shows that the SEC is not, like China, trying to ban all crypto. Of course, they want a slice of the pie. The guidline for determining where they can begin thier smash and grab operation is the Securities Exchange Act of 1934. Although antiquated, this does show some restraint.
They don't, immediately, try to come up with a new law to deal with crypto. Instead we get handed a tried and tested piece of legislation. There is a basic standard for determining whether to consider something a security or not based upon a 1946 Supreme Court case SEC v. Howey.
Under the Howey Test, a transaction is an investment contract 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
Although the Howey Test uses the term "money," later cases have expanded this to include investments of assets other than money. The term "common enterprise" isn't precisely defined, and courts have used different interpretations. Most federal courts define a common enterprise as one that is horizontal, meaning that investors pool their money or assets together to invest in a project. However, other courts use different definitions.
The final factor of the Howey Test concerns whether any profit that comes from the investment is largely or wholly outside of the investor's control. If so, then the investment might be a security. If, however, the investor's own actions largely dictate whether an investment will be profitable, then that investment is probably not a security. (from: What is the Howey Test? emphasis mine)
As far as STEEM is concerned we pass the first 3 questions, but the 4th is where we don't seem to fit the mold of a security. Mind you, I'm not a legal expert by any means, so you'll have to make your own judgement.
There are some people who invest in Steem who profit primarily by the efforts of others. However, the bulk of Steemizens stand to profit primarily by our own efforts.
Here is a section from the recently released: "Steem Blue Paper"
"Steem provides a scalable blockchain protocol for publicly accessible and immutable content, along with a fast and fee-less digital token (called STEEM)2 which enables people to earn the currency by using their brain (what can be called “Proof-of-Brain”). The two building blocks of this protocol, both blockchain and token, depend on each other for security, immutability and longevity, and are therefore integral to each others’ existence. Steem has been successfully operating for over a year, and has now exceeded both Bitcoin and Ethereum in number of transactions processed.
In the field of crypto-currencies, the unique properties of STEEM make it both “smart” and “social”compared to others, such as bitcoin and ether. This stems from two new token features. The first is a pool of tokens dedicated to incentivizing content creation and curation (called the “rewards pool”). The second is a voting system that leverages the wisdom of the crowd to assess the value of content and distribute tokens to it. These two unique properties when combined are referred to as Proof-of-Brain, which is an entendre based on Proof-of-Work, meant to emphasize the human work required to distribute tokens to community participants. Proof-of-Brain positions STEEM as a tool for building perpetually growing communities, which encourage their members to add value to the community through the built in rewards structure.
I can only guess that the recent ruling by the SEC was kept in mind as the Blue Paper was written.
Our investment into this platform increases our ability to interact with it and direct it's future. However it is primarily by our own efforts, as a community, that decide how much profit we stand to gain here.
My conclusion is that Steem is fairly safe from the SEC for now. There are many other ICO's out there which pass the Howey Test with flying colours, and are likely to find themselves in the cross-hairs sooner than we will.
Of interest in this discussion is the following article:
The strategy I present below attempts to error on the conservative side on how to launch a crypto currency without becoming an administrator or money transmitter or exchanger. In other words, it may be possible to violate my rules while still complying with the law in certain circumstances.
Here is the readers digest version:
- Do not pre-allocate any currency to yourself or others.
- Do not sell currency directly to others.
- Aways sell through a regulated exchange.
- Complete the currency and protocol prior to launch.
- Never promise to do anything for the currency.
There are no easy answers in this space and everything could change in an instant with a fresh interpretation of the rules by our unelected bureaucratic overlords. (From: How to Launch a Crypto Currency Legally by @Dan Larimer)
This shows both due diligence, as well as the lack of any real answers until we hear more from the SEC. Some of the activities involved with STEEM very likely could fit within the strictures of the Howey Test, but how the SEC decides to deal with us is yet to be revealed.
For now, Have Fun, and Steem On.
I'd be happy to hear your thoughts on the matter, and feel free to drop any relevant links in the comments section.
- finra.org - What investors Need to Know
- finra.org - Know Your Customer
- @lukestokes Are all ICOs now officially securities according to the SEC?
- sec.gov - What We Do
- sec.gov - SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities
- consumer.findlaw.com - What is the Howey Test?
- How to Launch a Crypto Currency Legally by @Dan Larimer
(this really cool article includes a recommended reading list by @dan.)
- @steemitblog - Announcing the Steem Bluepaper
- Steem Blue Paper (Required Reading)
- caselaw.lp.findlaw.com - SEC v. Howey
- irs.gov - IRS Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes
- sec.gov - Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934:
- sec.gov - Ponzi schemes Using virtual Currencies
- investor.gov - INVESTOR ALERT: BITCOIN AND OTHER VIRTUAL CURRENCY-RELATED INVESTMENTS
- news.21.co - Thoughts on Tokens
- forbes.com - Digital Coins And Tokens Are Just Another Kind Of Security
- vanbex.com - Security or not a Security. A crucial regulatory question