Part 2: What's a Security? Why Bitcoin, XRP, Altcoins and other Cryptocurrencies are not Securities?

The dilemma continues… Let's review.

From an interview on CNBC, Published 10:45 AM ET Wed, 6 June 2018 & Updated 6:59 PM ET Wed, 6 June 2018 CNBC.com.

The Chairman of the SEC Jay Clayton was quoted.."Cryptocurrencies: These are replacements for sovereign currencies, replace the dollar, the euro, the yen with bitcoin," Clayton said. "That type of currency is not a security."
He also stated, "A token, or a digital assets used in a fundraising process known as an initial coin offering, or ICO, are securities by Clayton's definition." Continued to state,"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," Clayton said. "We regulate the offering of that security and regulate the trading of that security."

Everyone blogger, YouTuber, and crypto enthusiast that reports on the Latest Crypto News to their followers via various social media platforms, are saying that "Cryptocurrencies are a Security." As quoted above. The only specific thing Clayton said for sure by naming Bitcoin, stating if used to replace a sovereign currency is not a Security.

This is where everyone is speculating that Clayton is "Inferring" that cryptocurrencies are "securities" due to the fact that when a startups need funding. They create an ICO to raise capital and in that campaign create a "token" to use as means in exchanging for legal tender or for other cryptocurrencies like Bitcoin, Ethereum or Litecoin. The second thing Clayton said that an Initial Coin Offering (ICO) which is a "token" a digital asset used in a fundraising process are Securities. In that quote, Clayton is stating that the ICO process is a "Security" not that the coin or token is a "Security. " But you will say… wait a minute The Draeke, an ICO is the coin or token. Well, in most cases the "token" created does qualify as a "Security " according to Clayton's third quote. "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," Clayton said. "We regulate the offering of that security and regulate the trading of that security."

In the project's that are created use their own "token" to campaign just to fund that project. Once the startup has raised enough funds to proceed to complete what they have set out to accomplish no longer need that created "token." In theory "tokens" are no longer needed. But these startups put their "Token" on a Cryptocurrency Exchange to trade with other cryptocurrencies in the "Speculation" that the invested project applications will be worth more than the monetary value of campaign contributions.

It has been said that the Majority of ICOs created for their projects will fail. Plus, most have not even come close to the equitable value to which investors hope receive in return hefty return if the campaign meets the minimum requirement.
According to an article on Coin Central written March 23, 2018 | Delton Rhodes Why are So Many ICOs Failing?

In a recent study, 418 of the 902 new crowdsales (46%) listed on Tokendata for 2017, have already failed. 142 failed during the ICO stage. 276 projects failed post-ICO. The alarming thing to note about this statistic is that these are only the projects that have already failed. An additional 113 ICOs are currently deemed to be 'unresponsive' to questions from the public on social media. This could equal to a lot of additional failures from the 2017 cohort of ICOs in the near future.

Let's define ICO and IPO. See What the difference Between the Two

DEFINITION of 'Initial Coin Offering (ICO)'

An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.

BREAKING DOWN 'Initial Coin Offering (ICO)'

When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm's initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.

What is the "rigorous and regulated capital-raising process required by venture capitalists or banks"? This process is called an Initial Public Offering - IPO

What is an 'Initial Public Offering - IPO'

An initial public offering is when a private company or corporation raises investment capital by offering its stock to the public for the first time. Growing companies seeking capital to expand are those that generally use initial public offerings, but large, privately owned companies or corporations looking to become publicly traded can also do them. In an initial public offering, the issuer, or company raising capital, brings in an underwriting firm or investment bank, to help determine the best type of security to issue, offering price, amount of shares and timeframe for the market offering.

BREAKING DOWN 'Initial Public Offering - IPO'

Some people refer to an initial public offering as a public offering. There are other ways to go public other than an initial public offering, including a direct listing or direct public offering. When a company starts the IPO process, a specific set of events occurs. The chosen underwriters facilitate these steps.
An external initial public offering team is formed, comprising an underwriter, lawyers, certified public accountants and Securities and Exchange Commission experts.
Information regarding the company is compiled, including financial performance and expected future operations. This becomes part of the company prospectus, which is circulated for review.
The financial statements are submitted for an official audit.
The company files its prospectus with the SEC and sets a date for the offering.

Published on Jun 9, 2018 a YouTube video by 24/7 Cryptocurrency News: Is the SEC clear on Crypto Regulations!? | CNBC Fast Money
Bert Redford still does not confirm on this issue but backs Clayton's response.

My analysis:

1. Bitcoin not a security.
2. Ripple XRP waiting to be defined in court.
3. Ethereum could become a commodity..?
4. IPO's are securities, which make their token a security, according to Clayton's definition.
5. Altcoins / Tokens are securities according to Clayton's definition.
6. These tokens may start as a security but may change if used replace a sovereign currency in which is not a Security.
7. Remember according to Investopedia definition of a "Security" states: It represents an ownership position in a publicly traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity's bond), or rights to ownership as represented by an option. Bitcoin, XRP, Ethereum, Altcoins and the other cryptocurrencies are not Securities due to the fact that most of these cryptos were created by Foundations / Nonprofits, so they are not securities.

Conclusion:
Your guess is good as mine. One thing is for sure, SEC say they won't make any exceptions for "Cryptocurrencies" in defining them, but eventually, SEC will need to make that "Definition" clear.

Sources:


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