Key Insights on the SEC’s position on Initial Coin Offering (ICO)

This week we asked Addy to analyze testimonies and speeches by SEC executives on cryptocurrency with a specific focus on ICO, Initial Coin Offering (ICO).

Addy discovered that when SEC talked about ICO, it mentioned Distributed Ledger Technology (DLT) in the same context. SEC stated that, “Commission’s message to issuers and market professionals in this space was clear, those who would use distributed ledger technology to raise capital or engage in securities transactions must take appropriate steps to ensure compliance with the federal securities laws”, in other words, ICO is considered security that is regulated by SEC.

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These insights show that the SEC is not against innovative technology such as distributed ledger, rather it actually thinks DLT has huge potential. Addy uncovered in this statement by SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo,  “Distributed ledger technology, or DLT, is the advancement that underpins an array of new financial products, including cryptocurrencies and digital payment services. Many have identified DLT as the next great driver of economic efficiency. Some have even compared it to productivity-driving innovations such as the steam engine and personal computer. Our task, as market regulators, is to set and enforce rules that foster innovation while promoting market integrity and confidence.”

Addy also found that SEC is on high alert of fraudulent ICO’s and taking enforcement actions including litigations. Last year, the Enforcement Division created a new Cyber Unit to target cyber-related misconduct and emerging threats. The Cyber Unit focuses on, among other things, … violations involving distributed ledger technology, including Initial Coin Offerings (ICOs). “Cyber-related threats and misconduct are among the greatest risks facing investors and the securities industry,” according to one statement from the commission. 

Addy insights show warnings that SEC has not yet approved for listing and trading any exchange-traded products (such as ETFs), holding cryptocurrencies or any other assets related to cryptocurrencies. “Investors who are considering these products should also recognize that these markets span national borders and that significant trading may occur on systems and platforms outside the U.S. Investors’ funds may quickly travel overseas without their knowledge. … There are significant security risks that can arise by transacting in these markets, including the loss of investment and personal information due to hacks of online trading platforms and individual digital asset “wallets.” A recent study estimated that more than 10% of proceeds generated by ICOs – or almost $400 million – has been lost to such attacks.”

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