IEOs May Get In 'Trouble' for Not Following Regulations: SEC

Valerie Szczepanik, the Advisor for Digital Assets and Innovations at the US Securities and Exchange Commission (SEC), has said that companies or organizations looking to raise funds via initial exchange offerings (IEO) must follow appropriate regulatory guidelines.

An IEO is a new type of crowdfunding model, which may be considered an improved version of the older initial coin offering (ICO) model. Although it’s still too early to accurately determine whether IEOs are more effective, when compared to ICOs, at raising capital for projects, the Bitfinex IEO has reportedly received $1 billion in funding within only ten days of its launch.

IEO Token Sales Must Follow Appropriate Regulatory Guidelines

Commenting on the current regulatory landscape, while attending the Consensus 2019 Conference on May 13th, 2019, Szczepanik stated that crypto or blockchain projects that are planning to list their IEO tokens must adhere to the relevant regulatory guidelines.

She also cautioned:

If they are not registered, they will find themselves in trouble in the US, if they have a US issuer or US buyers, if they are operating on the US market.

She further noted that firms that are looking to pay listing fees, in order to get their IEO tokens listed on exchanges should ensure that they complying with the relevant regulations. Szczepanik also mentioned that blockchain startups that are involved in broker-dealer type activities, such as finding buyers for issuers, must follow appropriate regulatory guidelines.

TokenLot Project Managers Ordered To Pay $417,000 In Fines

While speaking at Consensus, Szczepanik pointed out that TokenLot, a crypto broker-dealer managed by Eli L. Lewitt and Lenny Kugel, had been promoting its project as an “ICO superstore” (in September 2018). She added that TokenLot’s management had been “instructive in this regard.”

She also noted:

This was a platform that was assisting to bring buyers to ICOs [...] In that case, there was an enforcement action charging the platform with acting as a unregistered broker-dealer and participating in the distribution in violation of the registration provisions.

Last year, the SEC had accused both Kugel and Lewitt for breaking the law - as they had reportedly failed to properly register their business in the US. Although TokenLot’s management did not formally address SEC’s allegations, they did agree to pay $471,000 in fines for violating US financial regulations.

SEC Updates Regulations For Cryptoassets

In April 2019, the SEC had released an updated crypto regulatory framework, which was created by Szczepanik and Commissioner Bill Hinman. The new guidelines were drafted, in order to assist crypto industry participants in determining whether a digital asset can be considered an investment contract. In cases where a cryptoasset offering is deemed as an investment contract, then it must be regulated as a security, the new guidelines stated.

CME Looks to Double Bitcoin Futures Limit, but Is This Wise?

The Chicago Mercantile Exchange (CME) has a new request for its regulator, as it looks to double open position limits on bitcoin futures contracts in the face of significant interest.

Nasdaq reports that the CME has already petitioned its regulatory body, the Commodity Futures Trading Commission (CTFC), asking for an increase from 1000 contracts per spot month to 2000 per investor. Each contract represents five BTC, so essentially, at its peak,  a single investor's total position may edge towards a monumental 10,000 BTC.

This is in direct response to the contract's recent growth which is currently depicting record levels of activity, citing $370 million being traded per day. A spokesperson for the CME noted that the idea to increase limits was proposed on the continued maturity of the market:

Based on the significant growth and acceptance of our financially-settled CME Bitcoin futures markets, as well as our analysis of the underlying bitcoin market.

However, as Nasdaq writes the increase in the upper limit of positions is somewhat superfluous. As of July, the number of open interest contracts reached an all-time high of just 6100; given this, it seems the CME may be future-proofing.

Open to Manipulation?

However, concerns remain about the limit increase, as without them, the potential for manipulation rises; often to the detriment to the underlying asset. Although, as per the CTFC website, the threat of manipulation from bitcoin futures contracts is "low":

In general, position limits are not needed for markets where the threat of market manipulation is non-existent or very low.

Instead, Nasdaq posited that this might point to a lessening on the CTFC's strict rule of bitcoin; as well as a maturing of the market in general.

Nevertheless, some believe the CME's bitcoin futures contracts do pose a significant threat to the price of BTC; with some suggesting that blatant manipulation continues unchecked within the market.

As reported, there seems to be a correlation between the expiry dates of CME bitcoin futures contracts and a lull in the price point of BTC. In several instances, a significant drop in bitcoin's price has coincided with a closure from the CME. The most recent example of this occurred on Labor Day, September 2, when bitcoin rose an extraordinary 8% shortly after the CME shut.

Crypto analyst, Alex Kruger, highlighted this, noting the large gaps which formed on the CME chart, from the price discrepancy before and after closing.

This has become a pretty accepted practice within the market. Kruger has even gone to the lengths of compiling statistics each time this phenomenon transpired:

On these occasions, bitcoin cited an average 4.6% price discrepancy following the close of the CME.

Whether this is a coincidence or the market is indeed being actively manipulated is as yet unclear. Either way, with the increase of these limits it might be only a matter of time until we know for sure.

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