The US Commodity Futures Trading Commission (CFTC) is actively investigating the legality of initial coin offerings (ICOs) and the possibility of considering ICO tokens as commodities.
Speaking at Georgetown University’s first annual Fintech Week on October 19, leading cryptocurrency experts and regulators, including CFTC Commissioner Brian Quintenz and CoinCenter executive director Jerry Brito, debated the legality of ICOs. The regulation of the sector by US authorities was at the center of most fintech and cryptocurrency related discussions.
Quintenz, who attended the event as a panelist alongside Brito, explained that ICO tokens that begin as securities could transform into commodities, depending on their characteristics, purposes, and structures.
By definition, a commodity is “a basic good used in commerce that is interchangeable with other commodities of the same type; commodities are most often used as inputs in the production of other goods or services.” Virtual assets or products such as cell phone minutes and bandwidth are considered as commodities because they are interchangeable on a marketplace.
The CFTC is in charge of regulating the market wherein traders speculate the value and price movement of commodities through methods such as options, futures, and derivatives trading. Recently, the CFTC approved the launch of LedgerX, a digital currency-focused clearing house and derivatives trading platform, overseeing the trading of digital currencies such as bitcoin as commodities and assets.
ICO tokens could also be considered as commodities immediately after their launch if they start as tradable financial assets. Many ICO tokens are interchangeable and traded in the global cryptocurrency market through exchanges such as Bittrex and Bithumb. Hence, in the future, the CFTC could potentially start to regulate certain ICO tokens that qualify as securities and commodities.
“[digital assets] may actually transform at some point from something that starts off as a security and transforms into a commodity. That’s going to be a very difficult but important conversation for us to have to give the market certainty, to allow for innovation to flourish and continue, but to make sure that we’re being consistent in how we apply commodity law and protection of consumers across all products.”
But, he further emphasized that regulators must be cautious in regulating the ICO market and digital assets as commodities, as ICOs can quickly turn into commodities from securities, and the process of regulating many of these tokens in the global market would be challenging and complex.
“It was right to classify it as a commodity, but we still have a lot of work to do. ICOs, these things can transform. They may start their life as a security from a capital-raising perspective but then at some point — maybe possibly quickly or even immediately — turn into a commodity. There are new challenges all over the place with virtual currencies and commodities,” he added.
Since the beginning of 2017, blockchain projects have refrained from allowing US-based investors to participate in their ICO campaigns due to the ambiguous regulatory framework laid out by the SEC. In a sense, the CFTC and SEC are restricting an innovative market with impractical regulations and policies. ICO projects are currently not interested in cooperating with the SEC and distributing their tokens as securities or commodities. The trend has been to simply circumvent the SEC and CFTC by disallowing token sales in the US.
As Brito noted, it is important and optimistic that US authorities from CFTC and SEC are actively investigating better ways of regulating the market. But, excessive restrictions imposed on the ICO market will inevitably lead to the US blockchain sector falling behind other major regions such as Japan, South Korea, and Singapore.