[Research] Clayton's Cliff Notes

This was originally sent to subscribers of Messari's Unqualified Opinions. Click here to become a subscriber and access all of our historical content.

Katherine Wu - November 29, 2018

If 2017 was the year of the ICO, 2018 has been the year of the ICO regulatory crackdown.

This week’s Consensus Invest conference included a half-hour long fireside chat between Glenn Hutchins (founder of Silver Lake Partners) and Jay Clayton (SEC Chairman). It was, perhaps fittingly, the most packed session of the entire event, which had a much more sober (hungover?) mood than last year’s Invest when the BTC price first rocketed through $10k.

Three key takeaways from Clayton: (1) the SEC’s baseline assumption is that (most) tokens sales were (probably) unregistered securities offerings; (2) the SEC would like to see more crypto market surveillance tools and safeguards before the approval of ETFs; and (3) they are consistent in their warnings to the industry: ‘Get your act together’!

Nothing groundbreaking, but Clayton did acknowledge the potential of the technology for applications in securities markets and beyond. Which is genuinely exciting. While everything recently may *seem* doom and gloom on the U.S. regulatory front, consider these events:

• The SEC Chairman went on stage at a crypto conference for an extensive Q&A (and streamed it live to hundreds of thousands of people)
• The SEC's ethics office (notoriously difficult in granting any interviews/ public statement for SEC employees) approved one of its commissioners to go on the record on a crypto (!) podcast. Shoutout to Peter for making this happen!
• CFTC's LabCFTC put out a detailed primer on smart contracts, demonstrating the willingness to learn and to expand beyond its comfort zone.

It’s not in the best interest of U.S. regulators and lawmakers (and their constituents) to artificially constrain the crypto ecosystem to such an extent that projects leave the country. Governments and regulators around the world appear to be cautiously optimistic on crypto, and exploring how they can continue to facilitate capital formation in this new tech frontier and not get left behind.

• South Korea just granted its first certification to Upbit, a crypto exchange, for adhering to the country's compliance and security standards.
• We know lawmakers in jurisdictions like Bermuda, Malta, or Switzerland are actively exploring new frameworks of law that would allow for crypto to flourish.
• Regulators in Hong Kong and Singapore are working to provide for clear and plain-English guidance for crypto operators.

The U.S. will follow suit to develop something that will allow for the development for crypto markets, in time.

For now, though, token sales are pretty much DOA in the U.S. unless they are registered under one of the exemptions provided by federal securities law (TBI Note: or we eventually see the SEC issue no action letters to projects that have approached them proactively - don’t hold your breath).

How feasible is it for an early stage token project to provide all the information required by an exemption such as Reg A+ (basically a light version of IPO documents)? How can teams reconcile the nuances of Reg D offerings with the technical challenges of token distribution (super cumbersome in terms of restrictions on investor type and liquidity)? How well could Reg CF satisfy funding needs (maxed out at a million dollars per year and only available to US investors)?

If everything token issuance related should operate under the assumption that these are securities transactions, will any real innovation actually take place?

It may be frustrating, but with many token markets down 90%+, it’s not time to get too creative and/or find sneaky ways around the spirit of the law.

We are working to rebuild an entire financial system that took decades to build. The related law takes time to get implemented and is almost always behind technology.

So in the meantime, maybe we should lightly tap the brakes and get our act together.