Recently, Brad Garlinghouse appeared on a podcast with Joseph Grundfest, a former Commissioner of the United States Securities and Exchanges Commission [SEC]. Among other things, they spoke about Initial Coin Offerings [ICOs] and declaring them as securities.
A majority of ICOs offer tokens to investors in return for accepting funds in Ethereum [ETH] and Bitcoin [BTC]. While this itself brings the definition of the tokens to securities, the price of the token and the success of the investment depends on efforts carried out by those who accepted the funds.
The unregulated nature of the ICO markets has also led to a lot of scams and frauds coming to the forefront. Remarking on this, Grundfest stated:
“If these instruments are actually securities, they then have to comply with all of the regulations of the United States Securities and Exchange Commission and those are non-trivial.”
He further went on to speak about the process of registering a token as a security, finding exemptions from certain requirements, and other factors such as the restriction of sale on secondary markets. He stated that it added friction to the process, and that is the “last thing” that someone would want for quick and cheap transactions.
Ripple has also faced a number of lawsuits in recent times concerning XRP, where investors have begun suing the company over allegations of unregistered sale of securities. This was also addressed by Grundfest, where he stated:
“You’ve got people who have bought some of these instruments and have lost money taking their counterparties to court and arguing that what you sold me was a security. So what you have is a group of dissatisfied purchasers arguing that their crypto was security should have been registered and wasn’t.”
Garlinghouse provided statistics concerning the sale of ICOs in 2017, stating that it came up to above $3 billion, whereas in 2018 it has increased to $10 billion. Moreover, he stated:
“I would have guessed that would slow down in 2018 as regulators like the SEC interjected and more proactively called out frauds and scams. In many cases in fact I think they are securities and should be regulated that way this year.”
He further stated that he does not see the ICO boom slowing down “any time soon”, as regulators do not exhibit aggressive behaviour regarding them. He stated that they should, as it is a “little bit of a chaotic market”. Grundfast also agreed with Garlinghouse, stating that ICOs are the “most open and notorious violation of securities laws since the Code of Hammurabi”.