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Education

ICO of digital tokens

Now, let's say I know how to write smart contracts on the
Ethereum blockchain or even how to program my own
Legal ease: brand new blockchain from scratch, as a fork (copy) from
an existing chain or a new one altogether.

Suppose I decide to launch a token on my new blockchain
called "ISO" that represents one dollar of payment
processing services. This kind of token offering, of which
SEC crypto crack- there have been hundreds, is called an initial coin offering
(ICO). Investors might decide to buy ISO tokens and sell
down: Learning what them to merchants at a higher price, perhaps convincing
the merchants that the tokens will go up in price even
further.
ISOs have known for The fact that the ISO token is entirely digital and is in

some ways very different from a classic "share" in a
decades company does not undo the high probability that that
token is actually a security for which securities regulator
By Adam Atlas registrations or exemptions are required.
Attorney at Law Which ones are securities?
To help decide which kinds of offerings are securities, the
n early June 2023, the SEC filed claims versus leading guidepost is the 1946 case of SEC v. W.J. Howey Co.
the largest crypto exchange in the United States, That case produced the "Howey test," as it is commonly
Coinbase, and the largest crypto exchange in the known. In simple terms, according to the Howey test,
I world, Binance. In its over-100-page-complaints, the an offering is of a security when all of the following are
SEC alleges that they both operated as unregistered bro- present:
ker dealers of securities.
• The existence of an investment contract
In the ever-changing world of crypto, there has always
been debate around which of the hundreds of virtual • The formation of a common enterprise (that is, a
currencies and tokens issued are actually securities that business plan)
can be sold or custodied only by licensed broker dealers or
exchanges. Setting aside ideological arguments that one • A promise of profits by the issuer
person's distributed ledger is none of the government’s • The use of a third party to promote the offering
business, there is room for a rational and important
debate around how these would-be securities should be A big part of the SEC cases boils down to applying the
regulated. Howey test to the many tokens offered for sale and

Traditional IPO of securities exchange on the Binance and Coinbase exchanges.
Let's say I decide to build the next great ISO for selling Binance and Coinbase predicament
payment processing services to a new generation of Way back in 2013 and 2014 (before all the big law firms got
merchants. If I put up a website to sell shares in my new into fintech and crypto), I wrote some of the earliest letters
ISO, that public offering of shares in my company is to the New York Department of Financial Services and the
commonly known as an initial public offering (IPO). Department of the Treasury Financial Crimes Enforcement
Network (FinCEN) arguing how Bitcoin should or should
Under federal and state securities laws, it is illegal to carry not be regulated.
out an IPO without obtaining necessary registrations or
exemptions from registrations under those laws. What The legal landscape of crypto was simple back then
is more, buyers of the shares in my ISO may wish to because there hadn't been hundreds of ICOs—many of
trade those shares—which can only be done through a which were scams. There also hadn't been billions of
duly licensed exchange that facilitates the exchange of dollars evaporated or stolen in the ensuing crashes of
securities (that is, shares). MtGox, Celsius, Voyager Digital, Terra Luna, FTX and
others.
There are many publicly traded ISOs or payment
processing businesses including Fiserv, Square, WorldPay Regulators and courts are now a bit white knuckled when
and Nuvei. looking at crypto matters. The splashy news stories and

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