US Government to Focus on Investigating ICOs and Blockchain Violations
On September 25, the US Securities and Exchange Commission (SEC) announced the formation of a cyber task force that will focus the “Enforcement Division’s substantial cyber-related expertise on targeting cyber-related misconduct.”
In its announcement the SEC stated that it will target businesses and individuals that have violated existing SEC regulations on the distributed ledger technology and initial coin offerings (ICOs). The SEC also emphasized that it will crackdown pump-and-dump schemes along with fradulent projets within the blockchain and ICO markets. The SEC stated:
“The Retail Strategy Task Force will develop proactive, targeted initiatives to identify misconduct impacting retail investors. The Enforcement Division has a long and successful history of bringing cases involving fraud targeting retail investors, from everything involving the sale of unsuitable structured products to microcap pump-and-dump schemes. This task force will apply the lessons learned from those cases and leverage data analytics and technology to identify large-scale misconduct affecting retail investors.”
Over the past few months, the SEC has been increasingly focused on targeting ICOs and token crowdsales of blockchain projects that have offered securities to their investors. Specifically, the SEC targeted the DAO, the first ICO that was conducted on the Ethereum protocol, and Protostarr, an Ethereum-based advertising and revenue distribution platform for digital content creators.
The DAO was an automated hedge fund for startups within the cryptocurrency sector. Token holders of the DAO were considered as stakeholders and granted voting power of investments into cryptocurrency startups. Evidently, because the tokens promised investors equity and shares in cryptocurrency startups the DAO invested and according to SEC regulations, the DAO tokens fell under the defition of securities.
Protostarr was also similar to the DAO in the sense that it guaranteed investors shares of the revenues of digital content creators as securities. Both projects were inquired by the SEC, and were forced to shut down and fully refund their investors and token holders in bitcoin and Ethereum.
In the upcoming months, the US blockchain sector will see increased and tightened regulations on ICOs and which crypto-tokens are considered as securities. But, there is a workaround. Instead of offering shares or equity through ICO tokens, it is possible for startups to take the approach of CIvic, EOS, and other successful ICOs like Bancor by integrating the mechanism of a giftcard to their tokens. ICO projects could publicly advertise that their tokens do not have any purpose, use case, and are not a representation of equity but a digital asset that is redeemable and spendable.
As prominent venture capital investor Gil Penchina noted:
“Protocol-level tokens (Bitcoin, Ethereum, etc.) do not have any assets of any kind underlying them and remain far from the SEC’s current focus. Apps that give you a credit for future usage (Filecoin, Civic, Gnosis, etc.) are in my opinion still effectively pre-paid gift cards like an Amazon gift card, and are not covered by the SEC. I have no proof of this but the analogy is amazingly sound. Apps that ‘sell future income streams’ now have two examples of SEC scrutiny, and I would expect more.”