Abstract
As Bitcoin becomes popular among the masses and blockchain technology is adopted among different industries, more people have been investing in new cryptocurrencies in hopes of making a fortune. A cryptocurrency is a digital currency that uses code to verify transactions via a peer-to-peer network. Since 2016, emerging technology companies have increasingly opted to conduct initial coin offerings (ICO) to fund the development of their networks rather than pitch to venture capitalists or hold an IPO. In an ICO, developers sell a new cryptocurrency, sometimes called a token, that allows exclusive access to their network without selling off equity or granting investors voting rights. Retail investors looking for the next cryptocurrency to make Bitcoin-level gains in value are investing significant capital into these tokens without the protections afforded by the SEC for similar investment opportunities. In 2017, billions of dollars were raised by these ICOs, and many investors were duped by fraudulent sales. This year, ICOs are on pace to raise over $10 billion.
The U.S. government has regulated ICOs inconsistently. The SEC identifies most ICO “tokens” as securities, the IRS taxes them as property, and the FinCEN regulates them as money. For the SEC, applying the traditional Howey test to these tokens has proven difficult. While some tokens are clearly securities, others may not be, due to their independent utility as a means to access proprietary networks. Regardless, SEC warnings have not subdued ICOs. This Comment presents a new legal framework that meets the interests of the SEC, investors, and the innovative companies in the cryptocurrency industry.
