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The United States SEC has issued a warning to investors on ICOs and cryptocurrencies

The United States Securities and Exchange Commission (SEC) has now issued its own warning on cryptocurrencies and Initial Coin Offerings (ICOs) albeit has taken a tone friendlier than the Reserve Bank of India. The SEC told investors that no ICOs have been registered with the financial regulator and that it has not approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.

An ICO is the cryptocurrency analogy for the Initial Public Offering. In an ICO investors get virtual coins or tokens instead of a share in a company or fund.  The funds in a token are used to mine various cryptocurrencies like Bitcoin, DASH, Ethereum, Monero, Litecoin, Z-cash, and others. The funds can also be used to invest in other blockchain companies and ventures.

“As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost,” the SEC said.

However, SEC chairman Jay Clayton say that ICOs can be effective ways for entrepreneurs and others to raise funding, including for innovative projects. “However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require.  A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed,” he added.

Regulating ICOs as a security

Meanwhile, the SEC chairman did note how some people selling ICOs proposed that the tokens and coins were not securities. “Many of these assertions appear to elevate form over substance,” Clayton countered.

Note that there were reports that the SEC was looking to regulate ICOs a financial instrument as they have many aspects of a security.

“Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.  Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law.  On this and other points where the application of expertise and judgment is expected, I believe that gatekeepers and others, including securities lawyers, accountants, and consultants, need to focus on their responsibilities,” he added.

India regulatory situation

In India, the Securities and Exchange Board of India (SEBI) which regulates the securities market has not taken a stance on ICOs. Meanwhile, the RBI has not given any license or authorization to any entity to operate such schemes or deal with Bitcoin or any virtual currency. It said that any user, holder, investor, or trader dealing with cryptocurrencies would be doing so at their own risk.

There is confusion whether bitcoins and cryptocurrencies should be regulated as a “currency” or a “commodity”. 

However, in August 2017, an inter-ministerial report was submitted to the Centre by the department of economic affairs but the details of the report were not made open to the public. The committee was set up in April. However, a petition in the Supreme Court cited some parts of the report which said the following:

  • Bitcoins would fall under the purview of RBI’s 1934 Act. (This suggests that the government is looking to regulate Bitcoin as a currency).
  • Bitcoin investors should be taxed.
  • The RBI will have to issue guidelines regarding investment and purchase of Bitcoins.
  • If any foreign payment is made through Bitcoins, it would fall under the purview of Foreign Exchange Managment (FEMA) Act.

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