SEC Official Defends 'Balanced' ICO Oversight in Congress

A hearing at the House financial services committee saw hostility from some reps, sympathy from others, and a "balanced approach" from the SEC.

AccessTimeIconApr 27, 2018 at 4:00 p.m. UTC
Updated Sep 13, 2021 at 7:53 a.m. UTC
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A U.S. Congressman called for a ban on initial coin offerings (ICOs) during a hearing on Thursday.

The remarks from Rep. Brad Sherman (D-Calif.) came as William Hinman, the director of the Securities and Exchange Commission's Division of Corporation Finance, was speaking before the House Financial Services Committee's Capital Markets, Securities, and Investment Subcommittee. Hinman had told the committee that his division is "striving for a balanced approach" when it comes to cryptocurrencies and ICOs.

Yet Sherman argued against that line of thinking, asserting that token sales are detrimental to the economy.

"The reason for securities markets is to provide jobs in the real economy," Sherman remarked. "An IPO [initial public offering] does that, an ICO does the opposite. It takes money out of the real economy."

When Hinman began to argue that the blockchain technology that underpins ICOs "may have some promise," Sherman cut him off:

"I'm not saying ban blockchain, I'm saying ban the ICOs."

Hinman, in turn, pushed back by saying: "Some folks are finding that the ICO instrument allows for a different type of enterprise, one that's more decentralized, and which they think has some value."

During his opening remarks, Sherman struck a critical tone toward bitcoin in particular, remarking that "bitcoin is a security in that it is an investment."

It's a notable comment, given that it's one that the SEC is unlikely to agree with – Hinman's boss, SEC chairman Jay Clayton, suggested in November that while ICO tokens likely qualify as securities, bitcoin does not.

"When you depart from the bitcoin or the ethereum, and you get into the tokens, the hallmarks become pretty clear," Clayton told the Wall Street Journal.

Speaking to CoinDesk Friday, Digital Asset Research senior analyst and counsel Matt Gertler said bitcoin does not meet the Supreme Court's definition of a security.

"The first prong of the Howey Test is an investment of money," he said via email. "Considering that all bitcoin was mined and not sold for money at issuance, it is unclear how bitcoin would satisfy the Howey Test."

Not all negative

The reception to ICOs at the House subcommittee hearing wasn't entirely hostile, however. Rep. Tom Emmer (R-Minn.) criticized his colleagues' "ignorance about how special this area is."

Emmer's enthusiasm for cryptocurrencies is not new – he told CoinDesk in March that the U.S. must avoid overregulating the sector.

The lawmaker asked Hinman at Friday's hearing if there were circumstances in which a token sale would be "something other than a securities offering."

"It's quite hard to have an initial sale without having a securities offering," Hinman replied, "which is why the chairman has noted that the initial sale of these may require compliance or exemptions."

Emmer then asked about utility tokens, which ICO proponents argue should not be regulated as securities because they are designed to facilitate the usage of a blockchain-based network, rather than act as investments.

"We certainly can imagine a token where the holder is buying it for its utility and not as an investment," Hinman responded.

Hinman went on to suggest that the SEC would take a token's circumstances into account, "especially if it's a decentralized network."

"The issues around whether a particular coin offering may be a security are somewhat complex," Hinman told committee chairman Rep. Bill Huizenga (R-Mich.). He went on to say that his division's goal is to "not stifle innovation."

Capitol image via Shutterstock

This article has been updated for clarity. 


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