An adjunct business and law professor at NYU and general counsel at an investment bank Athena Blockchain is going all out to defend cases against token sales. Andrew Hinkes, recently joined a law firm, Carlton Fields, where he is going to deal with the litigating cases associated with the blockchain and crypto space.
Hinkes has been in the blockchain community since 2014 and has been involved in advising companies including bitcoin ATM networks, investment funds and token sellers. In the past, Andrew has also led the cases of his corporate clients in the domain of real estate, construction and consumer fraud.
Co-chair of Carlton Fields’ blockchain practice, Justin S Wales, has suggested that Hinkes joining the firm will help form a bridge between the firm’s corporate, litigation practices and crypto regulations. The reason of Andrew joining the firm and the firm letting him in can be inferred from Justin’s statement that the industry is seeing “a four-fold increase in suits involving cryptocurrencies or blockchain-based technologies in each of the last four years”. It’s a win-win for both the parties as both will gain from it. But what are the regulatory issues associated with cryptos?
The Initial Coin Offering (ICO) boom of 2017 took everyone by storm. An ICO is essentially a token sale where a blockchain or crypto startup sells its tokens to the general public in order to raise funding for the platform and to build its user base. 2017 saw a plethora of ICOs being raised but along with them also rose the cases of fraudulent scams. Fake ICOs became one of the best ways to con people into giving them money. After seeing what many fake ICOs had been doing, the United States Securities and Exchange Commission (SEC) stepped in and started to put a hold on the token sellers.
SEC halted the token sale of unregistered securities after which new projects started moving towards STOs, or security token offerings, in order to raise funding. A security is a tradable financial asset which falls under proper regulations put on the market since STOs are backed by a real-world asset. This stopped scam and fraudulent token sales but created another problem for legitimate token sellers who did their ICOs before the requirement of registering as a security. As per SEC, every company launching a security must get registered before the token sale. The SEC chair Jay Clayton has also said: “I believe every ICO I’ve seen is a security.”
One of the biggest issue in the crypto world right now is lack of regulatory clarity. It is also one of the reasons why an exchange-traded fund (ETF) has not been approved by the SEC. There are no concrete laws that inform crypto startups of their obligations. As stated by Hinkes;
The regulators, for the most part, have so far provided us with a bunch of orders that were written in the way to tell everyone what they expected to do, but it’s not guidance and it’s not a law,
Regulatory clarity can be achieved in two ways: The first is that Congress passes a bill regarding the token sales so that everyone is aware of the laws and regulations. The second is for the companies to go against the regulatory bodies and challenge their positions in court.
Various startups which raised funding before this order by the SEC are now struggling to prove their worth as a currency. In order to prove its credibility, the chat app Kik, which raised almost $100 million funding through its token sale, is planning to fight against the SEC which terms its token as an ‘unregistered security’ instead of a ‘currency’. Ted Livingston, the founder and CEO of Kik, stated in a medium blog post regarding this situation:
On page 11 of the 1934 Securities Exchange Act, the very act that created the SEC, it explicitly states that the definition of a security “shall not include currency.”
If something is a currency and not a security, it does not get registered with the SEC. Ted also said, “We all believe that this industry needs regulation, but we also believe that this is not the way to get it.”
It reasonable to expect that crypto startups and projects which consider themselves as currencies and not securities will also take a similar step. The fight with regulators might get intense moving forward from here on.
As Hinkes said:
“I expect that companies will push against the regulators, which will mean the companies will have to do internal investigations and will first investigate and then negotiate with the regulators. I think there will be significant civil and criminal litigation to come, an I believe it’s going to become a larger part of the cryptocurrency and blockchain world”.