​Is ICP a Security?

​How DFINITY's Blockchain Project Could Face Regulatory Scrutiny.

Photo by Maxim Hopman on Unsplash
​​The Internet Computer Protocol (ICP) is a blockchain project that aims to create a decentralized platform for building and running software applications, websites and services. It was developed by DFINITY, a Swiss-based foundation with a large research and development team.
​ICP claims to be the world's first blockchain that runs at web speed and can scale to unlimited capacity.

​Launch Pumped the Token to the Moon

​ICP also has its own native cryptocurrency, also called ICP, which serves as both a utility and a governance token.
​Utility tokens are used to pay for network fees, such as deploying smart contracts or storing data. Governance tokens are used to participate in the network's decision-making process, such as voting on proposals or upgrading the protocol.
​ICP tokens were launched in May 2021, after several rounds of fundraising that raised more than $300 million from investors.
The tokens were initially distributed to early backers, developers, employees and community members. They were also listed on several major exchanges, such as Coinbase and Binance, where they quickly reached a market capitalization of over $40 billion
​However, ICP's meteoric rise also attracted attention from critics, who questioned whether the tokens could be classified as securities under US law. Securities are financial instruments that represent ownership or debt in a company or project, and are subject to strict rules and regulations by the Securities and Exchange Commission (SEC).
The SEC has not issued any official guidance or enforcement action on ICP tokens yet, but it has previously applied a legal framework called the Howey Test to determine whether certain crypto assets are securities.

​The Howey Test consists of four elements:

  1. ​There is an investment of money
  2. There is an expectation of profit
  3. The investment is in a common enterprise
  4. The profit is derived from the efforts of a promoter or third party
​If all four elements are met, then the asset is likely a security and must comply with the SEC's registration and disclosure requirements. Otherwise, it may face legal action or penalties from the regulator.
​Some analysts have argued that ICP tokens could meet all four elements of the Howey Test, based on the following reasons:
  1. Investors used money (either fiat or crypto) to buy ICP tokens, either directly from DFINITY or from secondary markets
  2. Investors were led to expect profits from the appreciation of ICP tokens, based on DFINITY's marketing materials, white papers and roadmaps
  3. Investors pooled their money in a common enterprise, namely the Internet Computer Protocol blockchain, which is controlled and maintained by DFINITY and its affiliates
  4. Investors relied on the efforts of DFINITY and its affiliates to develop, launch and operate the Internet Computer Protocol blockchain, as well as to promote and distribute ICP tokens
​On the other hand, some defenders have argued that ICP tokens could not meet all four elements of the Howey Test, based on the following reasons:
  1. Investors did not use money to buy ICP tokens, but rather exchanged them for other crypto assets, such as Bitcoin or Ethereum
  2. Investors did not expect profits from the appreciation of ICP tokens, but rather used them for their utility and governance functions on the Internet Computer Protocol blockchain
  3. Investors did not pool their money in a common enterprise, but rather participated in a decentralized and autonomous network that is governed by its users
  4. Investors did not rely on the efforts of DFINITY and its affiliates to develop, launch and operate the Internet Computer Protocol blockchain, but rather contributed their own resources and skills to the network
As you can see ICP fails in some criterias
The debate over whether ICP tokens are securities is not only academic, but also has practical implications for both DFINITY and its users.
If ICP tokens are deemed securities by the SEC, then DFINITY may have to register them with the regulator and disclose detailed information about its operations, finances and risks.
​It may also have to face lawsuits or fines for violating securities laws in the past.
If ICP tokens are deemed securities by the SEC, then users may have to comply with additional rules and regulations when buying, selling or holding them.
They may also face limited access or liquidity for ICP tokens, as some exchanges or platforms may delist them or restrict them to accredited investors only.
In the end, the question of whether ICP tokens are securities will depend on how the SEC interprets and applies the Howey Test to this novel and complex case.
Until then, both DFINITY and its users should be aware of the potential risks and uncertainties involved in dealing with ICP tokens.