More Welcome Than Warning? The DAO Ruling Could Transform Securities

CoinDesk's Noelle Acheson looks at how the recent warning by the SEC could end up changing the regulated securities market.

AccessTimeIconJul 31, 2017 at 8:05 a.m. UTC
Updated Sep 13, 2021 at 6:47 a.m. UTC
AccessTimeIconJul 31, 2017 at 8:05 a.m. UTCUpdated Sep 13, 2021 at 6:47 a.m. UTC
AccessTimeIconJul 31, 2017 at 8:05 a.m. UTCUpdated Sep 13, 2021 at 6:47 a.m. UTC

Noelle Acheson is a 10-year veteran of company analysis and the author of CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to CoinDesk subscribers.

The blockchain world was rocked last week by the release of the U.S. Securities and Exchange Commission's analysis of The DAO, the distributed organization set up to "automatically" manage the funding of ethereum apps, and which collapsed last year after an exploit in its code was unveiled.

While the conclusion that The DAO tokens were, in fact, securities and should have been registered as such was not in itself surprising, the statement marked the first time the US Securities and Exchange Commission (SEC) has officially issued an opinion on digital tokens.

Its conclusion was that just because an asset is on a distributed ledger does not mean it is exempt from security laws. In response, initial coin offering (ICO) issuers and investors have been sent scrambling to figure out how vulnerable they are to the long reach of US securities law.

The short-term impact on digital token issuance is likely to be sharp.

But there's something else going on here that will end up boosting blockchain development and injecting a welcome dose of innovation into securities issuance and regulation.

It's not so much that the SEC has officially determined that blockchain assets can be considered securities and therefore have to comply with the law. It's that blockchain assets can be considered securities at all.

And if blockchain assets can be considered securities, securities can be transformed into blockchain assets.

This takes the Delaware achievement (changing the law to allow registered businesses to issue securities on a blockchain) and magnifies it, sending a signal to all states that a federal regulator is willing to broaden its definition of acceptable transmission methods.

Gearing up

The SEC has authorized blockchain-based securities in the past, but requests have been sparse. It has also imposed improper activity fines on cryptocurrency businesses. So, it is no stranger to the technology, and has spent some time investigating both the potential and dangers.

This recent development is a notable step forward, however, in that it reveals what could be the beginning of a sea change in company finance and investment. Not only does it show a willingness to apply securities concepts to digital assets, it also heralds a broadening of what is understood by "security."

In addition, it sends a message to other jurisdictions that blockchain-based assets are not going away. Securities regulators around the world have been intensifying their efforts to catch up with the innovations while fulfilling their mandate of protecting investors. Guidance from the SEC is likely to help.

What's more, regulation that is sort of in sync across borders will boost support for a technology that is not location-bound.

Entrepreneurs and developers will have more confidence in their project's outlook knowing that it is compliant in multiple jurisdictions, with access to a broader pool of investors.

The impact need not be limited to new technology businesses. With the definition of "security" changing, traditional issuers could be tempted to step up trials of blockchain-based assets.

Far from suppressing innovation in the digital token space, the SEC statement – while limited in its initial scope – is likely to boost more serious experimentation, both within the blockchain sector and without.

It could even end up being what was needed to push the development of blockchain solutions for the trading of shares and bonds to a new level.

Glass half full image via Shutterstock

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