That’s why a court has ruled that a $100 million initial crypto coin offering (ICO) by Kin was an illegal unregistered securities sale.
When all is said and done, currency is supposed to allow one to spend a store of value on goods and services essentially instantly.
Even the most established crypto-currency, Bitcoin, takes hours, if not days, to process a transaction.
It is not a meaningful medium of exchange for even the most basic commercial activities:
The 2017 launch of the Kin cryptocurrency broke federal securities laws, a federal judge has ruled. Federal law requires anyone who offers a new security to the general public to register with the Securities and Exchange Commission. The messaging app maker Kik didn’t do that when it sold $100 million worth of Kin in 2017.
The company argued that Kin was legally a new virtual currency, not a security. In a Wednesday ruling, Judge Alvin Hellerstein rejected that claim. The ruling could have big consequences for the cryptocurrency world.
Since 2016, hundreds of cryptocurrency projects have held Kin-like “initial coin offerings” that raised millions—in a few cases, hundreds of millions—of dollars. Few of these offerings went through the traditional steps required to register a securities offering with the SEC. So Wednesday’s ruling could create legal headaches for existing blockchain projects launched via an ICO. It also limits the options for launching cryptocurrencies in the future.
Judge Hellerstein gave Kik and the SEC three weeks to come up with a joint recommendation on appropriate remedies. Kik says it is considering appealing the ruling.
How a cryptocurrency offering is like an orange grove
A security is an asset that investors purchase in hopes of making a profit. It includes traditional investment vehicles like stocks and bonds, but it also includes a catch-all category called an investment contract. The Supreme Court laid out the legal criteria for investment contracts in a landmark 1946 ruling.
In his Wednesday ruling, Hellerstein concluded that similar logic applies to the Kin tokens Kik sold in 2017. Officially, Kin owners are not entitled to any profits generated by the Kin ecosystem. But practically speaking, people bought Kin because they hoped a thriving Kin ecosystem would push up Kin’s value the same way that bitcoins and ether had become more valuable over time.
Hellerstein notes that Kik CEO Ted Livingston repeatedly touted Kin’s potential as an investment opportunity. “If you could grow the demand for it, then the price—the value of that cryptocurrency would go up, such that if you set some aside for yourself at the beginning, you could make a lot of money,” Livingston said.
This was a common way to bootstrap a new cryptocurrency during the 2017 ICO boom, and the Kik ruling could slam the door shut on this method for getting a new blockchain project off the ground. Registering as a security comes with a lot of regulations. Complying with those regulations will, at a minimum, require a lot of legal work. And some cryptocurrency projects might not fit into existing SEC rules at all.
This is a good thing.
ICO’s are a recipe for fraud.