Corporate Advisory

SEC Subpoenas Hit Crypto Industry

Blockchain Capital’s Bart Stephens on risks of experimenting without safe harbor, exodus to Singapore, Switzerland and Malta, and how NFTs are the killer dapp

“If 2017 was a raging party, then 2018 is the hangover,” laughed Blockchain Capital’s Bart Stephens as he addressed the Back to the Crypto Future conference during SF Blockchain Week. “You can’t have an asset class go up 20 to 30 times, like in the case of Bitcoin and Ethereum, and not have some sort of retrace. It’s the nature of capital formation and speculation.”

”What we saw last year was that the Ethereum ERC20 standard really captured the imagination of both investors and entrepreneurs worldwide where with just two lines of code you could create your own crypto assets, whether it was a utility token or a security token. Whether the category of utility token even exists in the eyes of the SEC, we saw $18 billion of capital being raised with a kind of Kickstarter on steroids. It proved Ethereum as a platform for global crowdsourcing,” said Stephens commenting that ICOs made it possible for entrepreneurs to bypass raising capital from traditional VCs, a far more arduous task that involves established relationships on Sand Hill Road and greater scrutiny and due diligence of investors.

“It’s a challenging time if you’re an entrepreneur or investor right now, primarily due to acute regulatory uncertainty. There’s no path forward if you’re a token issuer. If you touch the U.S. in anyway, it’s a contagion that can turn your token into a security. It’s a frustrating environment.”

“There’s a tremendous amount of innovation happening here. Some of the largest market cap companies and projects are based in San Francisco including Coinbase, Ripple, Coinlist, Kraken. It’s important for regulators to recognize that this is a global phenomenon. The markets of China, Korea and Japan are incredibly important. From a regulatory point of view, the U.S. is offshoring innovation. They’re saying the U.S. is closed for business, go to Malta, go to Singapore, go to Switzerland.”

Referencing Ripple’s Swell 2018 conference last week in which former U.S. President Bill Clinton delivered the opening keynote, Stephens said with the birth of the internet in the 1990s, the Clinton Administration took a hands off approach to let innovation flourish. Federal regulatory entities like the FTC, FCC and even the IRS said no sales tax on your Amazon order, thus giving entrepreneurs and venture capitalists the rules of the road.A

“When you know the rules of the road, the magic of U.S. capitalism can happen which is the efficient allocation of capital to the world’s most promising entrepreneurs.” Stephens said, “That is no longer happening here. The crypto industry has been dangerously naive over last three years and have assumed U.S. regulators have a balanced approach to innovation on one side and consumer protection on the other. Things have changed markedly in the last six months. There are hundreds of subpeonas out in the crypto industry right now. This is not well known. Whether they’re exchanges, or law firms, or investors and ICOs, startup companies as little as three people. What we’re seeing as a result is capital formation is freezing.”

“It’s very unclear how a protocol would conduct a public sale of a utility token to U.S. investors. There’s no guidance from appropriate regulatory authorities on that. The SEC is applying laws that are on the books which were written in 1933, 1934 and 1940. Crypto assets are a new asset class and ill-equipped to be dealt with security laws that are getting close to nearly 100 years old. It’s hard to look out two or three years because things are getting worse for U.S. entrepreneurs and investors, not better.”

As for larger economies, Stephens added

“We need to take a holistic approach to fostering innovation that recognizes that this is a new decentralized technology that’s global. Writing legislation that is better crafted and not 89 years old. Provide a safe harbor for entrepreneurs who are trying to innovate.”p

The SEC was also at the Back To The Crypto Future Conference with Scott Walker on the opening panel discussing the SEC mandate to balance capital formation and efficient markets with investor protection. For guidance, he directed the audience to SEC Director Bill Hinman’s remarks on applying the Howey Test, CryptoMom Hester Pierce‘s’ dissenting opinion in support of an ETF that would give retail investors access to bitcoin, and newly appointed Crypto Czar Valerie Szczepanik, who oversees ICOs.

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