The crypto markets have been shaky ever since the IRS and SEC announced that they were going to investigate the markets and introduce regulatory controls. The decision by the SEC in particular to treat new ICOs as securities shook confidence and reduced the number of new projects planned for the year. The SEC annual report put ICOs right in the crosshairs.
Cryptocurrency ICOs are considered an effective way to raise finances. Investors in crypto are usually aware of the risks and products offered by new FinTech companies. However, the SEC annual report ruled that ICOs must be held liable to the same degree as any other company trying to raise funds for investment.
ICOs have been put on notice to file the same regulatory forms as companies who register as publicly traded companies. Dozens of ICOs were forced to return their security funding to investors, thus completely defeating the purpose of crowdfunding. Thus the SEC annual report has had a major impact on the future of ICOs.
Experts believe that the SEC is now looking at virtual exchanges more than individual crypto platforms. The evidence suggests that they are enforcing stricter policies across the spectrum. According to the SEC annual report, this is the case indeed.
SEC Annual Report
The most recent SEC annual report reveals that cryptocurrency projects and ICOs have become the focus of the SEC’s regulatory enforcement this year. The SEC policies have been driven by five principles;
- A focus on protecting the Main Street investors
- A focus on individual business accountability
- Keeping up with changing technology
- Enforcing policies that effectively improve enforcement goals
- Assessing methods of resource allocation
ICOs are mentioned more than 25 times in the 2018 SEC annual report. The commission revealed that they were investigating more than a dozen ICOs as of September. Many of those investigations are still underway.
A number of ICOs were served with more severe complaints due to suspected fraudulent activities. Most notable among them is an ICO by AriseBank that claimed to be world’s first decentralized bank. The SEC annual report claims that investors were being duped with fraudulent claims that $21 million USD had been raised.
Another project named “Tokenlot” claimed to be an ICO superstore. They were selling cryptocurrencies as an unregistered broker.
The SEC annual report also noted a recent case against 1Broker, an international securities dealer. They allegedly violated federal securities laws by offering security-based swaps funded with Bitcoin.
In total, the SEC brought forward 20 enforcement actions related to ICOs and cryptocurrencies. Individuals were charged in more than 70 percent of the cases. Among those charged were business CEOs, accountants, auditors, technical experts and CFOs.
High Risk Investments
The SEC has made it mandatory for all crypto projects to stipulate that ICO’s represent risky investment vehicles. The recent crackdown on cryptocurrency is considered by some as excessive overreach by the Federal regulatory authority.
The SEC maintains that it wants to create a balance between curbing fraudulent ICOs and allowing growth of innovative and legitimate capital formation projects.
The SEC annual report also warned that investing in a project that has no history of performance, no viable product and no revenue stream should be approached cautiously by investors. The authorities have also discovered that some projects who claim to be using ‘blockchain technology’ are actually outright frauds. They are simply using amateur programs to try to give the appearance of being an emerging technology.
One ICO project claimed to offer a 13-fold profit to investors in less than a month. The SEC annual report calls out several similar cases where developers and promoters were either grossly exaggerating figures or outright lying to investors.
The controversy of ICOs and cryptocurrency related projects are referenced in section ‘Policing Cyber-Related Misconduct’, subsection ‘ICOs and Digital Assets’.
Effects on the ICO Industry
Many experts believe that a more regulated crypto industry will stifle growth. However, in the long term, the industry and investors will benefit in a major way. It’s called credibility and professional ethics.
No one will deny that there aren’t scams and fraudulent ICOs in the market. It can be argued that the number of scams to legitimate projects is overstated by the media, however the number is not zero and we all should welcome a measure of regulation to protect investors.
We should not deny that the ease of starting an ICO and investing in projects was one of the major attractions of the industry. With more regulations, we will see more control and red tape, increasing the cost of starting a legitimate blockchain platform.
The only businesses that will want to take the risks are those who have a tested product that has a good chance at success in the markets.
The number of projects testing new technologies may decrease thus suppressing the speed of innovation in cryptocurrency. We more than likely will see fewer new projects in the years ahead.
In the end, the balance will make the entire industry better and more trusted.