US Securities and Exchange Commission chair Jay Clayton has emphatically told investors that cryptocurrencies must abide by existing financial rules rather than see the framework twisted to accommodate them.
Clayton is a hugely influential regulator as the head of the powerful SEC.
In an interview, he was clear about the definition of a security.
“We are not going to do any violence to the traditional definition of a security that has worked for a long time,” said Clayton.
“We’ve been doing this a long time, there’s no need to change the definition.”
Follow the rules
Defining if a cryptocurrency is a security or not makes a huge difference to the compliance requirements and costs coin issuers must meet.
Clayton also explained the SEC would not listen to pleas to change regulations govern initial coin offerings (ICOs), which have raised more than $9 billion so far in 2018.
“If you have an ICO or a stock, and you want to sell it in a private placement, follow the private placement rules,” he said. “If you want to do any initial public offering with a token, come see us.”
But, he warned, expect to follow the law.
Clayton also cleared up what the SEC considers as the difference between a digital currency and a security.
The Howey Test
Cryptocurrencies are intended as replacements for sovereign currencies, replacing the dollar, the euro, the yen with bitcoin,” Clayton said. “That type of currency is not a security.”
“A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say ‘you can get a return’ that is a security and we regulate that. We regulate the offering of that security and regulate the trading of that security.”
The definitive judgment is the Howey Test, called after a ruling in a 1946 case before the Supreme Court.
The test says a security is financial investment in a common enterprise, in which the investor expects to profit the efforts of others.
Clayton was not ambiguous about ICOs – he says they are securities and if it is a security, it’s regulated.