Regulation

ICOs, SEC And Wait And See?

The SEC fired a regulatory shot across ICOs’ bows this week, sending out information requests and subpoenas to a slew of firms. The door opens for more oversight, and perhaps a freezing effect on the token sales, even while illuminating a darker corner of the cryptocurrency realm

And so, the SEC might be shorthand for “Scare Every Cryptocurrency Firm.”

News came this past week, and a regulatory shoe of sorts dropped when the U.S. Securities and Exchange Commission issued scores of subpoenas and Requests for Information (RFIs) focused on initial coin offerings (ICOs).

On the one hand, the move is hardly unexpected. After all, the regulatory clime has been getting a bit heated for all things crypto based – and as has been seen elsewhere in the world, such as in South Korea, all sort of stakeholders in the bitcoin/Ethereum/etc. game have been drawing increased scrutiny from regulators … everyone from exchange operators to miners.

And in a world where the investments in ICOs have lurched into the billions of dollars, the regulation of a thus far unregulated (ICO) U.S. market is a given.

The exact identity of the firms being examined by the SEC is at this point unknown. So is the exact number of requests. Some outlets, like The Wall Street Journal, tally it as “dozens,” while CoinDesk said it could be in the hundreds.

One thing is for sure: The shadowy cryptocurrency world is about to get some sunshine – and sunshine, as the saying goes, is a good disinfectant.

The investigations might have several effects – some intended, some inadvertent. The intended impact is likely this: The U.S. has been somewhat, at least arguably, late to the ICO regulation game.

Might other countries provide a template? In February news, the People’s Bank of China is mulling building onto actions taken last year, which included an outright ban on ICOs and shuttering exchanges. The new measures, Reuters reports, include government monitoring of overseas websites tied to cryptocurrencies. In South Korea, regulation is ongoing, and has seesawed between draconian measures (it was rumored, for example, that ICOs would be banned) and perhaps less draconian measures (such as taxes to be levied on profits stemming from cryptos). In March, of course, at the G20 summit, France and Germany will bring bitcoin and cryptos to the debate, front and center. In Japan, licensed trading outlets seem to be the way to go.

Here in the States – as bitcoin and cryptos have become synonymous with froth, with get-rich-quick dreams, with cautions over bubbles and Tulipmania rendered in bits and bytes—the dangers are real.

ICOs have been pegged for everything from tax evasion to a long list of incidents where hackers have lured the unwitting into lost funds (not to mention technical glitches that have had the same impact). Ernst & Young has estimated that 10 percent of funds raised by ICOs fall prey to hackers, a tidy sum equating to $400 million.

Painting them with a broad brush may be unfair, as some firms seek to raise funds to bring legitimate projects to market. But a broad brush seemingly might be applied where there’s been nothing on the canvas before – at least when it comes to regulation, which so far in the U.S. has been piecemeal. Thus the push this past week, when the SEC sent out its requests.

The February SEC news comes, of course, two months after the Commodity Futures Trading Commission (CFTC) gave the go-ahead for bitcoin futures to be listed – and transparency in any market is a good thing. Other agencies, such as the Justice Department, have been focusing on money laundering.

In a statement earlier last week, Overstock.com, which is conducting an ICO seeking as much as $250 million for tZero, a cryptocurrency subsidiary, said in an SEC filing that “while the SEC is trying to determine whether there have been any violations of the federal securities laws, the investigation does not mean that the SEC has concluded that anyone has violated the law.”

And in further detail related to the ICO, Bloomberg reported on March 1 that Overstock CEO Patrick Byrne said the SEC has “very broad questions” about Overstock, tZero and, as the newswire termed it, “more specific inquiries into how Overstock knows its token investors are accredited.”

Said Byrne, per Bloomberg, “They want to know everything about what we’re doing in the world of ICOs and they want to have a conversation. We’re super compliant. We welcome this.” The request from the SEC, said Overstock, has been one for voluntary information, and Byrne told Bloomberg his firm has not received a subpoena.

Overstock went on to say that, “also, the investigation does not mean that the SEC has a negative opinion of any person, entity or security.”

That last word, security, is the rub.

There has been debate in the past that ICOs are, or are not, offerings of securities, and thus fall well into the SEC’s purview.

Amid all this, of course, comes Telegram, which – eyeing a $1 billion ICO – has raised $850 million. The funds are slated to help develop the Telegram Open Network blockchain network and bolster efforts with the company’s messaging and platform.

Might this be a last hurrah? Nah. We don’t think so – the ICO in some form or another will be a staple of fundraising in cryptoland, even in a heavily regulated form.

But you know the old saying: Where there’s smoke, there’s concern of a fire. And in the legal/regulatory world, where there’s concern, there are often subpoenas.

And where there are subpoenas, there are often even bigger questions. And where there are questions, there is uncertainty. And uncertainty can lead to a freeze on the very smallest of ICOs coming to market, or even bigger ones.

So, to expand on another acronym: ICO might be shorthand for It’ll Cool Off.

Turning to the CFPB…

Not all regulatory matters focused on cryptos this past week. The Consumer Financial Protection Bureau (CFPB) continues to evolve under the stewardship of acting director Mick Mulvaney. As reported, Mulvaney might opt to let other regulatory agencies supervise efforts related to consumer compliance. That oversight might extend to agencies including the Federal Reserve Board and the Comptroller of the Currency. The joint efforts, according to reports, would cut down on duplicative activities and reduce some regulatory burden for financial firms.

Separately, the agency is gearing up to publish a series of RFIs in the Federal Register, which seek commentary on enforcement, supervision and other activities.

And on the International Stage…

As PSD2 and Open Banking took shape in Europe, ripple effects could be felt elsewhere. GlobalData has said in a “Retail Banking, Customer Insight Survey” that India may be ready for similar sharing of data. Some building blocks are there – including Aadhaar, the 12-digit ID code that is tied to biometric data.

Further priming the pump for data sharing, as GlobalData noted, the country put into place APIs through IndiaStack two years ago, and also introduced the Bharat Interface for Money, which allows for the acceptance of payments from any bank.

Challenges remain, according to the analysts, as the report noted that authorities must consistently recalibrate their policies to address cybersecurity vulnerabilities, among other risks.

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