At a time when the U.S SEC has continued cracking down on ICO tokens for not complying with ‘securities law,’ a DApp Developer on the Stellar ecosystem has said that ICOs could even fall farther behind from regulatory requirements.
The reason is that smart contracts which are the primary mechanism used to issue tokens during a Security Token Offering(STO) or Initial Coin Offering (ICO) have a loophole that the SEC may use to regulate the crowdfunding model in the future.
Speaking to a crypto publication, CryptoBriefing, Ben Wilkening, Director of Strategic Partnerships at Token IQ reckoned that many ICO projects do not know that they are not meeting up to a specific SEC law.
The nature of smart contracts does not allow third parties on the blockchain to transfer assets. That is to say that in an event where an investor loses his private key, there is no way for the tokens or “securities” to be recovered.
“This is a staunch violation of SEC compliance” according to Ben who explained why.
“Somehow, in the smart contract realm, if you lose your password, you lose your tokens. The SEC doesn’t like the fact that access can be completely lost on a glaring oversight,” he argued.
It is known that a substantial part of cryptocurrencies market cap belong to wallets with lost private keys which mean that neither the owners nor developers could gain access to the funds.
Ben suggests that the SEC may not allow this for ICO and STO tokens which the regulators are now classifying as “securities.”
Solution To Smart Contract “Securities” Flaw
Token IQ DApp builders claim that building their project on the Stellar blockchain has afforded their Security Token Trading platform the ability to solve the smart contract “securities” flaw.
Somehow, the blockchain allows DApps to be built without smart contracts. This, in turn, enables the platform operators to gain access to lost funds which they will return to users who forget their private keys.
The users will be required to comply with KYC/AML laws from which their details can be confirmed in the event of lost private keys.
“The benefits are much better, both for us and investors,” Ben concludes.
Only time will tell whether newly developed Decentralized applications will have to migrate their solutions to a different blockchain to meet up with SEC standards.