SEC Announces Enforcement Actions Against ICOs As Crypto Markets Tumble

John Vibes

Yesterday (Nov 14th) the U.S. Securities and Exchange Commission (SEC) released their annual enforcement report, revealing dozens of actions that the regulatory agency took against ICOs and digital assets this year.

News of these enforcement actions were not made public until the details were announced in the following Tweet:

The fine print of the report indicated that many of the ICOs in question are still ongoing and operational, which is not unusual in such cases.

Unless an investment is clearly fraudulent and criminal, the SEC will typically allow the businesses they have penalized to continue operating and generating revenue, but the balance sheets of these companies often take significant damage because a large portion of that revenue disappears due to fines.

The report states that:

When warranted, the Division has recommended enforcement actions to the Commission in matters involving ICOs. As of the close of FY 2018, the SEC had brought over a dozen stand alone enforcement actions involving digital assets and ICOs. While many of these cases have involved allegations of fraud, the Division also has pursued enforcement actions to ensure compliance with the registration requirements of the federal securities laws. In the past year, the Division has opened dozens of investigations involving ICOs and digital assets, many of which were ongoing at the close of FY 2018

 

Recent SEC Activity

At last week's Fintech Week Conference in D.C, William Hinman, director of Corporation Finance for the SEC, announced that the agency will finally be issuing "plain English guidance" on ICOs. After years of keeping crypto investors in the dark, the SEC has recently started imposing standard financial regulations on digital assets.

Instead of laying down guidelines for people to follow however,  the agency seems to be classifying blockchain businesses in ways that they can be fined under traditional laws. While the industry has yet to see clear guidelines,  it is beginning to see enforcement.

Last Thursday, the SEC announced that it had settled charges against Zachary Coburn, the founder of decentralized exchange EtherDelta. The agency claimed that the decentralized exchange "operated as an unregistered national securities exchange," a charge that left many exchanges and blockchain based projects in fear of similar action.

It is possible too that this regulatory confusion played at least some role in this week's massive sell-off in crypto markets, in which many coins lost 20% of their value or more, with bitcoin (BTC) dropping below $6,000 for the first time in several months.

ErisX Tells Regulator's Why Ethereum Futures Would Create Better Markets

  • Nasdaq and Fidelity Investments-backed ErisX exchange sends explanation letter to CFTC.
  • Letter explains that regulated Ether-based futures contract would create more efficient crypto markets.

ErisX, a US-based digital asset exchange, has filed a comment letter with the US Commodity Futures Trading Commission (CFTC) - after the federal regulator requested more information regarding Ethereum (ETH)’s current market.

Submitted on Friday, February 15, ErisX’s letter asserted:

The introduction of a regulated futures contract on Ether would have a positive impact on the growth and maturation of the market.

As covered, ErisX is a newly launched cryptoasset exchange that received $27.5 million in starting capital from multi-trillion dollar investment manager, Fidelity and Nasdaq Ventures, which is Intercontinental Exchange’s (ICE) VC investment division.

Consistent With CFTC's Efforts

In December 2018, ErisX’s management revealed its plans to offer bitcoin (BTC), litecoin (LTC), and ether (ETH) spot trading and it also noted that it was seeking regulatory approval - in order to list cryptocurrency futures at a later point this year. Explaining why such futures contracts would help investors, ErisX’s letter noted that “listing and trading Ether futures compliantly on CFTC regulated markets is consistent” with the financial regulator’s efforts to create “open, transparent, competitive, and financially sound derivative trading markets.”

The letter from ErisX further mentioned that regulated crypto-based futures would “prohibit fraud, manipulation, and abusive practices in connection with derivatives and other products subject to the (Commodity Exchange Act) CEA.” According to the CFTC, bitcoin can be considered a commodity as it has been designed to potentially replace existing fiat currencies (as a medium-of-exchange). Because of bitcoin and ethereum’s decentralized nature, they are arguably not securities, the CFTC has clarified on several occasions.

Explaining the differences between the Ethereum and Bitcoin protocol, ErisX’s letter has stated: 

Ethereum built upon some of the architectural principles of Bitcoin to extend [its] functionality of [a] distributed, (cryptographically) secured, (blockchain-enabled) record-keeping system to include new computational capabilities for the execution of arbitrary code.

"Unregulated Exchanges And Brokers" Trying To "Fill The Gap"

Per ErisX’s analysis of current trends in the global Ethereum (and larger digital asset) market, there is still not a proper regulatory framework in place. This, according to ErisX, has discouraged several large enterprises from entering the fragile crypto ecosystem. At present, ErisX believes there’s a trend emerging in which “unregulated or lightly regulated ‘exchanges’ [and] ‘brokers’ [are trying] to fill the gap, many of them off-shore.” However, ErisX cautioned there may be certain risks associated with this type of market such as increased volatility and liquidity fluctuations.

As noted in ErisX’s letter:

Not unique to Ether, but [current crypto markets could suffer due to] the current fragmented global market structure of trading platforms and ‘exchanges’ with significantly varying degrees of regulatory oversight and operational transparency and integrity.

By introducing standardized, CFTC-regulated Ether-based financial products, ErisX argues the crypto space might receive a more positive response from institutional investors - which could potentially lead to “more robust, liquid, and resilient markets.”