SEC Regulatory Fight Against ICO Crypto Fraud Could Shape US Legal Scene


The regulation of cryptocurrencies has quickly become one of the most important concerns to regulators all over the world. But the nature of the industry often means that things move quickly and relatively unpredictably.

As the crypto markets continue to grow in sophistication and public interest, the work of regulators will become more and more difficult. For the United States, the battle has been primarily waged against ICOs, the proverbial “wild west” of the cryptocurrency markets. ICO markets have traditionally been the breeding ground for fraud and scams across the board.

But the SEC has been working in the past few months to establish a clearer set of guidelines regarding the market, which has unfortunately been the source of hundreds of federal investigations concerning potential fraud across a variety of ICO startups and industries.

The consideration of ICO regulation strategies seems especially important to the SEC, especially given the massive growth ICOs have seen in the past three years. Starting at only around USD $4.35 million in volume in 2014—a small percentage of the total money in the crypto markets—Initial Coin Offerings comprised a staggering $31.08 million in funding this far into 2018 alone. The ICO market is even encroaching on the territory of traditional Venture Capitalist (VC) investment, which has long been the go-to source of funding for startups with significant repute.

As a major industry with assumed room to grow, the Initial Coin Offering market presents a perfect entry point for U.S. regulators looking to establish some semblance of control in the crypto markets which have dominated the news and financial cycles since late 2016. The markets have grown at impressive rates with ICOs almost doubling from 2017 to 2018.

The nature of participation in the ICO markets has changed drastically, as well. Though 2017 was no small year for the industry, many investors were small, retail investors looking to make a quick buck or incentivize a project they believed in. But in 2018, major institutional money has hit the Initial Coin Offering game, meaning that regulation has become a necessity more than a potentiality.

ICOs Face Legal Pressures

According to a piece published by Bloomberg, part of the reason that ICOs are turning to private, institutional investors is that they have been faced with increased legal and regulatory threats from the SEC and similar regulatory institutions. Institutional investors typically have a much better hold on compliance-related issues, and fundraising strategies operating with traditional methods are much less likely to draw the ire of regulatory authorities.

This ire has grown, as well. According to the NASAA, or the North American Securities Administrators Association, a combined cryptocurrency investigation effort called “Operation Cryptosweep” created intense and active investigations into over 200 Initial Coin Offerings, many of which continue today. Of these 200 investigations, there are over 46 unique “enforcement actions” being taken against organizations that combined regulatory powers deemed to be problematic.

Examples of these crackdowns litter the web. Earlier this month, the Securities and Exchange Commission targeted a hedge fund called Crypto Asset Management, fining the company and its leader around USD $200,000. Additionally, the SEC was successful in shutting down TokenLot, a self-proclaimed “ICO Superstore” which the SEC concluded had illegally sold securities. They paid a fine to the tune of over USD $500,000.

An Unclear Present Stance

Unfortunately, the flurry of regulatory actions against Initial Coin Offerings and blockchain corporations does not necessarily mean that the United States has forged a much-needed clear framework for cryptocurrency and ICO regulation. Instead, experts outline that the regulatory status of crypto is still largely unclear within the United States—and it might remain so for a while.

Part of the confusion comes from the complex legal and regulatory scene in the United States. While some countries have one financial regulator tasked with overseeing securities, commodities, and other assets, the U.S. has several unique regulatory institutions with nuanced purposes and jurisdictions. For example, the U.S. can nod to the CFPB, the SEC, or the CFTC to regulate cryptos, and it is not clear which one has the final say on the status of the digital assets within the country.

One clear takeaway from the intentions of these organizations, though, is that they do not seem to desire to prevent innovation within the crypto community. The main prerogative of many regulators, as has been stressed in numerous interviews and manifestos, is to reign in some of the troubling trends on the market, rather than to prevent the prosperous markets from expanding and innovating.

The Future of Regulation

According to financial expert Braden Perry of Kennyhertz Perry, LLC., regulators in the United States will eventually decide to view cryptocurrencies as traditional investment products, applying an underlying system for regulation, but providing space for states and individual jurisdictions to add exceptions and unique provisions to incentivize growth of the markets.

This future is not without its obstacles, however. Perry outlined that regulators must first “get on the same page” when it comes to a cohesive and coherent regulatory strategy with which to broach the difficult subject of digital assets or cryptocurrencies. The comprehensive framework that would clarify so much for industry participants can only be effective if agencies work together as one unit under a shared concept of what crypto needs to be, from the regulatory standpoint.

Government Progress

Much of the uniting of agencies will come from the legislative branch, some experts say. In this respect, the United States Congress is heading in the right direction. Warren Davidson, a Republican representative from Ohio, announced his intention to host a roundtable with cryptocurrency professionals from around the country to discuss the regulatory future of the industry.

Dubbed officially “Legislating Certainty for Cryptocurrencies,” the plan of the roundtable is to spark a discussion on how lawmakers can quell the concerns of regulators in a way that still allows the cryptocurrency industry its much-needed space to continue to grow, develop, and thrive within the United States.

A Republican congressman from Minnesota also introduced new cryptocurrency bills earlier in the week, outlining that the U.S. should be on the forefront of cryptocurrency and blockchain technology development. But alas, the debate rages on within a divided congress. Once Congress works to stand behind a cohesive regulatory stance, perhaps the community of market participants will finally begin to get the clarification they so desperately desire.

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