In large part, the exchange of cryptocurrencies and Initial Coin Offerings (ICOs), have remained in the wild west from a regulatory standpoint. Developments of the past several months, however, indicate that a change is underway.
The most significant development is the SEC’s increasing assertions that crytocurrencies are securities, and therefore within its jurisdiction. This was perhaps most clear when the Chairman of the SEC, Jim Clayton, issued his December 11th Statement on Cryptocurrencies and Initial Coin Offerings. Despite the SEC taking its first enforcement actions in 2017, to that point in time, some had speculated that the SEC might either largely avoid classifying cryptocurrencies as securities, or be hesitant to take enforcement actions.[i] Clayton put a damper on that speculation, stating that although the determination is always fact-sensitive,
[b]y and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved.
I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.
(Emphasis added). Clayton’s message was clear: not only is the SEC certain that cryptocurrencies are, or will often be, securities, the Commission intends to more forcefully regulate them.
This change in posture was perhaps telegraphed in July 2017 when the SEC issued its report on The DAO (Decentralized Autonomous Organization), which was notoriously hacked for a loss of roughly one third of its assets.[ii] The SEC’s detailed report systematically concluded that The DAO’s ICO was indeed an offering of securities that required registration and compliance with all applicable U.S. securities laws – and yet, the SEC declined to take any enforcement action. In other words, the DAO report was a warning shot.
Since that time, the SEC has brought several enforcement actions in the crypto space.
In August 2017 the SEC froze three ICOs based on concerns about the accuracy of the information they were offering to potential investors.[iii] Next, it successfully quashed two ICOs connected to Maksim Zaslavskiy alleging that they were entirely fraudulent; that is, the ICOs were not connected to any blockchain at all, and the businesses connected to the coins were not operational.[iv]
More recently, in the first enforcement action by the SEC’s new “Cyber Unit,” it obtained an order freezing the assets of PlexCorps, for its ICO of “PlexCoins.”[v] The SEC alleged that PlexCorps was “promising a 13-fold” return in a month or less, telling investors that it had retained expert executives that it had not, and spent funds on “extravagant personal expenditures.”[vi]
Finally, the SEC halted an ICO for Centra Tech on the basis that the ICO was issuing false and misleading statements in marketing the offering.[vii] For example, Centra Tech claimed that the ICO funds would be directed to investments backed by VISA and Mastercard. This action gained significant notoriety, at least in part, because Centra Tech hired celebrities such as Floyd Mayweather to pump the offering.[viii]
The common thread in each enforcement action is the appearance of fraud. In fact, Clayton spoke at a Princeton event this month and confirmed that this is their focus. Clayton stated that his “hope is that [the SEC’s enforcement actions are] helping – because this technology is being used for fraud and to the extent that it’s being used for fraud, history shows that government comes down harshly on that technology later.”[ix]
This begs the question of whether the SEC will next pivot to enforcing the registration regulations at large. Thus far, however, nothing has indicated that they will. Rather, all signs indicate that that Clayton, and the SEC under his direction, is genuinely fearful of over-regulation in the crypto space.
[i] See, e.g., Former SEC chief says regulator not equipped to take on bitcoin
[ii] SEC Release No. 81207 (July 25, 2017), available at [LINK]
[vi] Complaint, ________ available at: https://www.sec.gov/litigation/complaints/2017/comp-pr2017-219.pdf