Chris Concannon, the president and CEO of Cboe Global Markets recently was interviewed by Quartz, and he was asked to comment on the speech given on 14 June 2018 by William Hinman, the director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission (SEC). In that speech, William Hinman talked about the "Howey Test" and how the SEC is considering applying it to cryptoassets in order to determine which ones are unregistered securities. It is important to note that Concannon worked as a staff attorney at the SEC in the Division of Market Regulation from 1994 to 1997, and so it is safe to assume that he is quite knowledgeable about U.S. federal securities laws.
In this article, we are going to highlight parts of Concannon's comments regarding the SEC.
Concannon started by saying what he thought was the most significant part of Hinman's speech.
The SEC doesn’t think ether is a security at this point in time. Now, what was interesting is Mr. Hinman did talk about how they also recognize that some coins that were originally securities can transform to non-securities at a later date. I think that was the more important macro statement within the speech.
Here, it seems that Concannon is referring to the part of the speech where Hinman made the following remarks:
"And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions... Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. "
The fact that the SEC seems to have forgiven Ethereum, which started life as an ICO (according to CryptoCompare, the ETH token sale was held between 20 July 2014 and 2 September 2014), suggests that the SEC might be willing to take a similarly understanding approach to other cryptocurrencies that have become much more decentralized over time.
Next, Concannon started talking about what happens if the SEC decides to declare that a particular token/coin is an unregistered security.
The SEC has been quite clear that many of these ICOs are unregistered securities offerings. It presents a real problem for anyone involved in the trading of an unregistered securities offering, even if it’s a coin. There are real legal liabilities that can develop for anyone—not only are you an unregistered broker dealer but you can also be deemed an unregistered underwriter. And that can create quite sizable liabilities if you’re not careful about how you go about things. If you’re broadcasting on your platform an unregistered security that is part of an offering, one could argue that you’re an unregistered underwriter and you could be liable for any part of that offering.
This means that the SEC could potentially go after every non-registered U.S. exchange that has ever offered on its trading platform a token (excluding ETH, of course) that was initially sold as part of an Initial Coin Offering (ICO); an example of such an exchange is Poloniex, which its parent company, Circle, is hoping to get registered as an Alternative Trading System (ATS) as soon as possible to avoid legal trouble.
It creates a very large legal liability before you even get to the steps that regulators could take against you. Registering as a broker dealer or ATS [Alternative Trading System]—that solves your go-forward liability from a regulatory perspective, but it doesn’t solve your look-back liability from a legal perspective.
Concannon seems to be saying that even if a crypto exchange gets Broker-Dealer and ATS licenses from the SEC and FINRA, it could still face prosecution for violations of federal securities laws during the period that it was not registered (and therefore, not authorized to allow trading of securities on its platform). However, perhaps, Concannon is being a bit too pessimistic here since it does not make much sense for the SEC to approve an exchange's application for these licenses and then try to put that exchange out of business.
It becomes complex for everybody in the chain of that offering, from the original issuer of that coin, to everyone who participated and really to the end user, whether it’s a retail user or some other holder. What can they possibly do with that coin? Where can they hold it? Firms can’t take the coin because of fear of being deemed to be holding an unregistered security or being in the securities business as an unregistered broker dealer.
It is easy to understand why the original issuer of a token would be in legal trouble. But is he right about the difficulties that holders of that token would face? Well, they could move those tokens either to a hardware wallet (e.g. if they are planning to HODL), or they could move them to an SEC-regulated crypto exchange within United States (currently, there are no such exchanges, but after Coinbase's recent acquisitions, it seems poised to become the first SEC-registered U.S. crypto exchange), or possibly to a crypto exchange outside the U.S. that does not care what the SEC thinks (although, there are likely to be very few major such exchanges).