The SEC just published a report concluding that the DAO (Decentralized Autonomous Organization) set up on the Ethereum blockchain in 2015 qualified as “securities” under American law. Since neither the DAO itself or anyone else bothered with registering this security with the SEC, collecting over $150 million at the time was illegal. And having these tokens on exchanges without registering the exchange was illegal as well.
While the report concludes that this token sale was illegal, it doesn’t recommend taking any enforcement action against anyone. No one will go to jail for these illegal acts. The purpose of the report is to call attention of the industry to securities law. This will lead to less token garbage being unloaded on investors. The days where it was way too easy to collect way too much money with nothing but a whitepaper to show may be over.
That’s a good thing.
And this SEC response is great news. They might have decided to prosecute anyone involved in this mess. They might have decided that the Ethereum token sale was illegal under securities law as well. They might have started to arrest anyone involved in Ethereum tomorrow. And while they’re at it, they might have advocated making all cryptocurrency illegal to put an end to this kind of illegal security offering.
That was the backlash I saw as a risk two months ago. This report means that if there is such a backlash coming, it will not come right now.
And actually, this is a great occasion for anyone involved in token sales to engage with the SEC and just comply with the registering requirement. You need to disclose information to potential investors to do that, but any project unable to handle that kind of requirement shouldn’t collect millions of dollars from investors in the first place.
There’s a good reason to have securities law, and that reason doesn’t disappear because you take Ethereum instead of dollars.
The market doesn’t seem to like this report. Total market cap is down by around $8 billion since yesterday, from $95 billion to around $87 billion at the time of this writing. Maybe people are afraid that losing the use case of defrauding investors in illegal securities sales detracts from the value of cryptocurrency.
I think the exact opposite is the case. Just as having regulation in place in Japan since this year making it impossible for random people to operate crypto exchanges was good news for adoption here, it is good news for cryptocurrency that fraudulent investment schemes will be less common in the future.
And if you disagree, this report is still good news. Enforcement action could have been much worse.
This time, no one goes to jail for the DAO mess.