As many of you are well aware of the regulatory environment regarding cryptocurrencies, tokens, and businesses built on top of Blockchain has been a grey area to say the least. We at INLOCK have always been pursued of complying to all and any relevant regulation to ensure the legal safety of all platform Participants. As in the past, we have consulted with numerous regulators and lawyers – completing the Howey Test in advance – took enormous efforts to design the ILK token and ecosystem to make ILK a pure utility Token.
On Nov 16, 2018, the SEC issued the “Statement on Digital Asset Securities Issuance and Trading” in which the Commission has brought a number of actions involving offerings of digital asset securities. To date, these actions have principally focused on two important questions. First, when is a digital asset a “security” for purposes of the federal securities laws? Second, if a digital asset is a security, what Commission registration requirements apply? The importance of these and related issues is illustrated by several recent Commission enforcement actions involving digital asset securities.
The Commission also pointed out that advancements in blockchain and distributed ledger technology have introduced innovative methods for facilitating electronic trading in digital asset securities. Platforms colloquially referred to as “decentralized” trading platforms, for example, combine traditional technology (such as web-based systems that accept and display orders and servers that store orders) with new technology (such as smart contracts run on a blockchain that contains coded protocols to execute the terms of the contract). These technologies provide the means for investors and market participants to find counterparties, discover prices, and trade a variety of digital asset securities.
A platform that offers to trade in digital asset securities and operates as an “exchange” (as defined by the federal securities laws) must register with the Commission as a national securities exchange or be exempt from registration. The Commission’s recent enforcement action against the founder of EtherDelta, a platform facilitating trading digital assets securities, underscores the Division of Trading and Markets’ ongoing concerns about the failure of platforms that facilitate trading in digital asset securities to register with the Commission absent an exemption from registration.
According to the Commission’s order, EtherDelta—which was not registered with the Commission in any capacity—provided a marketplace for bringing together buyers and sellers for digital asset securities through the combined use of an order book, a website that displayed orders, and a smart contract run on the Ethereum blockchain. EtherDelta’s smart contract was coded to, among other things, validate order messages, confirm the terms and conditions of orders, execute paired orders, and direct the distributed ledger to be updated to reflect a trade. The Commission found that EtherDelta’s activities clearly fell within the definition of an exchange.
While we are ready to launch INLOCK’s internal exchange (TokenMarket) in light of the above statement, we decided to pause the release, until our legal staff is able to evaluate the new situation.