More than 40 regulators throughout North America engaged in
what they called “Operation
Cryptosweep,” which has resulted in “nearly 70 inquiries and investigations
and 35 pending or completed enforcement actions,” according the to the North
American Securities Administrators Association (NASAA), a group of state and
Canadian government watchdogs, per a NASAA news conference in May.
The regulators’ actions “are just
the tip of the iceberg,” NASAA President Joseph Borg said at the conference,
noting that the sweep also found approximately 30,000 crypto-related domain
name registrations, “the vast majority of which appeared in 2017 and 2018.”
Focusing mostly on ICOs and cryptocurrency trading, Borg
said the promoters “promised lucrative profits with wildly speculative assertions.”
Spurred by the global interest in cryptocurrencies and blockchain technology,
more than $4 billion was raised last year alone through ICOs, according
to the U.S. Securities and Exchange Commission (SEC).
State regulators and the Commodity Futures Trading
Commission (CFTC), the federal regulator that oversees commodities trading,
last week also agreed to cooperate
in policing emerging financial technologies. In February, CFTC Chairman J.
Christopher Giancarlo told
the Senate Banking Committee he favored a registration process for
distributed ledger and cryptocurrency startups.
One online operation, called Leverageico.com, sold digital
currencies called “leverage tokens” and promised investors it would make money
through a “risk-free trading platform” using “automated arbitrage trading
bots.” Other sites would display fake videos or unauthorized endorsements from
celebrities like Jennifer Aniston and Supreme Court Justice Ruth Bader
Leverageico.com operators claimed that the site raised more
than a half million dollars and recruited more than 5,000 users. It was subject
to a cease and desist order by the Alabama Securities Commission on May 2,
although its website appeared to be
still operational and selling tokens at the time of this writing. There was no
contact information listed on the site.
What do these crackdowns mean for institutional and venture
capital investors and companies funding blockchain applications? Little impact
is seen on the venture capital business, since these private parties perform
extensive due diligence in vetting companies. Although not every ICO or trading
platform is fraudulent, the legitimate operations are transparent and focused
on specific blockchain applications.
Yet for firms raising money for
blockchain projects through U.S.-based ICOs, the impact could be significant. Coin
offerings raised more than three times the capital for blockchain startups than
venture capital firms, reported Crunchbase News, totaling $4.5 billion for the past 14 months through
Will federal regulation and aggressive state crackdowns slow down
the ICO capital flow for blockchain developers? While it’s too early to tell —
it’s uncertain what shape U.S. regulation will take — it may push ICO activity
outside of the U.S.
“A lot of people are nervous,” said Ron Wince, CEO of Myndshft.com, a
blockchain-based AI company based in Mesa, Arizona. “It could pour cold water
on this market and may influence U.S.-based entrepreneurs to locate outside of
But as more regulatory attention is focused on registering
ICOs in a similar way to initial stock offerings, that is, as securities, coin
offerings will come under greater scrutiny. A surge in ICOs last year led the People’s
Bank of China to ban the offerings, claiming they disrupted financial
Following suit, the SEC later that year issued bulletins,
investor alerts and warnings about ICOs, noting it will “continue
to police this area vigorously and recommend enforcement actions against those
that conduct initial coin offerings in violation of the federal securities
laws,” according to SEC Chairman Jay Clayton.
Although the agency has taken 16
enforcement actions against ICO/cryptocurrency operators since 2013, the
indicated when it will propose specific rules to regulate the industry,
although Clayton said that the SEC was “pursuing various
initiatives to increase efficiency and enhance investor protection.”