SEC chairman urges caution over cryptocurrencies and ICOs

Gladys Abbott
December 13, 2017

"A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are now operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation", Mr Clayton said.

His statements were not entirely negative. Startups offering ICOs have argued that the cryptocurrency tokens offered during the fundraising process are not equity in a company and hence are not subject to security laws.

Longtime cryptocurrency boosters reacted to Clayton's statement on social media and in news outlets and, overall, their response was decidedly neutral.

His statement echoed an earlier SEC warning in July. "Said another way, replacing a traditional corporate interest recorded in a central ledger with an enterprise interest recorded through a blockchain entry on a distributed ledger may change the form of the transaction, but it does not change the substance". South Korea has simply banned ICOs, noting in September that "stern penalties" would be levied on anyone issuing one.

Munchee Inc. launched its ICO in October, promising to build a new platform "that looks to disrupt sites like Yelp and Google Places by introducing an immutable blockchain ledger for food reviews".

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The SEC told investors that no ICOs have been registered with the financial regulator and that it has not approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.

"By 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". The company communicated through its website, a white paper, and other means that it would use the proceeds to create the ecosystem, including eventually paying users in tokens for writing food reviews and selling both advertising to restaurants and "in-app" purchases to app users in exchange for tokens.

"Please also recognize that these markets span national borders and that significant trading may occur on systems and platforms outside the United States", Clayton said. The SEC says that bitcoin investors are more likely to end up as targets of fraudsters and investment opportunities with high risks.

Clayton quickly expands his example, though, to say most ICOs are like companies raising money for yet-to-be-build publishing houses, and that people are not really buying the tokens to get books-but instead to resell for profit.

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