North American Regulators Crack Down on ICOs in ‘Operation Cryptosweep’
Securities regulators in Canada and the United States revealed that nearly seventy coordinated investigations into fraudulent cryptocurrency investment schemes, focusing on ICOs, have been opened in the past month. Authorities from more than forty jurisdictions in North America were involved in what was dubbed “Operation Cryptosweep.”
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“Just the Tip of the Iceberg,” According to Regulatory Chief
The North American Securities Administrators Association (NASAA) made the sweep announcement today, noting that it was one of the largest coordinated enforcement operations to ever take place between the two countries. The NASAA said that thirty-five of the cases have led to pending or completed enforcement actions so far. Additionally, the task force discovered 30,000 domain name registrations related to crypto crowdfunding schemes.
The President of the NASAA, Joseph Borg, said:
“The persistently expanding exploitation of the crypto ecosystem by fraudsters is a significant threat to Main Street investors in the United States and Canada, and NASAA members are committed to combating this threat. The actions announced today are just the tip of the iceberg.”
The investigations are in response to a proliferation of cryptocurrency-related scams due in part to the tremendous increases in value of cryptocurrencies over the past year. Most of the fraudulent activity is related to initial coin offerings (ICOs), which use cryptocurrencies to fund speculative business ventures. A recent Wall Street Journal investigation found nearly twenty percent of ICOs since 2014 involved some kind of misrepresentation or fraud.
ICOs Under Pressure
Though ICOs are reported to have raised more than $5.6 billion USD in 2017, they have come under pressure since last summer due to increased regulatory scrutiny. In September 2017, Canadians were excluded from the $100 million ICO of Ontario-based Kik Interactive because of uncertainty over the legal status of the Kin tokens issued.
Other ICOs have been canceled, including the highly anticipated Telegram messaging app offering. Though the company claimed it didn’t need a public sale, as it had raised $1.7 billion via private fundraising, fears of regulatory compliance likely also played a role in the cancellation.
In Canada, the Canadian Securities Administrators has said that most ICOs can be considered sales of securities. The story is much the same in the United States, with Securities and Exchange Commission (SEC) chief Jay Clayton saying at a U.S. Senate hearing back in February that, “I believe every ICO I’ve seen is a security.”
However, two months later, the agency indicated more potential flexibility when the director of its Division of Corporation Finance, William Hinman, said that not all tokens issued during ICOs were necessarily securities. He also said that it might be possible for a token to transition from a security to a utility token over time, as long as it was intended to be used to buy goods and services and not as a speculative investment.
The hope of a utility token loophole has resulted from those who invested in and facilitated some of the largest public ICOs lobbying governmental authorities for lenience. The NY Times reported last month that venture capitalists and other investors were seeking exemptions from U.S. securities laws for some digital tokens, such as Ethereum’s ether.
ICOs appear to be transitioning from a unregulated free-for-all to an alternate method of doing crowdfunding, an already accepted way to raise funds. Legality varies by jurisdiction, and Satis Group co-founder Emma Channing recently said at the Crypto Invest Summit in Los Angeles that companies considering doing one should seek out an advisor. The new reality of increased law enforcement and regulation means that the days of unregulated “token sales” are likely over.
Have your say. Do you believe ICOs should be more tightly regulated?
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