After what many considered a dithering reluctance, the bureau charged with maintaining order in the world’s biggest speculative markets, the US Securities and Exchange Commission (SEC), is ramping up efforts to consider regulatory policy toward cryptocurrencies, ICOs, and cryptocurrency funds. This comes directly after two key executive appointments this year along with ever-more attention drawn to the ecosystem due to bitcoin’s stratospheric price rise.
SEC Chair Talks Cryptocurrency Buzz
Statement on Cryptocurrencies and Initial Coin Offerings was the title of prepared remarks made 11 December from SEC Chairman Jay Clayton. “The world’s social media platforms and financial markets are abuzz about cryptocurrencies and ‘initial coin offerings’ (ICOs). There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, ‘this time is different’,” he declared.
His audience was both regular investors and professionals. For “MainStreet Investors,” Mr. Clayton asserted, the crypto world offers “substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation,” emphasizing investors “should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies,” he explained.
Underscoring the borderless nature of cryptocurrencies, Mr. Clayton highlighted how trading can occur in different countries all over the world. “Your invested funds may quickly travel overseas without your knowledge. As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.”
He did give encouraging comments on ICOs, however, referring to them as “effective ways for entrepreneurs and others to raise funding,” a change in tone from earlier statements. In an effort to balance his lauds, he then referred to an 18 page report on the agency’s DAO token investigation, and its subsequent cooperation with a cross-border crackdown of a Canadian business they termed a “scam.”
He was quick to stress professionals should understand selling “securities generally requires a license, and experience shows that excessive touting in thinly traded and volatile markets can be an indicator of ‘scalping,’ ‘pump and dump’ and other manipulations and frauds.”
Regarding cryptocurrencies in particular, he emphasized the SEC’s jurisdiction would extend to “securities firms and other market participants that allow payments to be made in cryptocurrencies, set up structures to invest in or hold cryptocurrencies, or extend credit to customers to purchase or hold cryptocurrencies.”
He concluded by detailing a universally agreed upon truth: “The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing.”
Company Halts ICO after SEC Raises Registration Concerns
Within the scope of the Mr. Clayton’s first crypto-specific speech came another press release the same day from the SEC.
According to the published announcement, “before any tokens were delivered to investors, Munchee Inc. refunded investor proceeds after the SEC intervened. Munchee was seeking $15 million in capital to improve an existing iPhone app centered on restaurant meal reviews and create an ‘ecosystem’ in which Munchee and others would buy and sell goods and services using the tokens.”
The company’s proposal seemed to be rewarding reviews with proprietary tokens, along with selling restaurant advertisements. Munchee made the grave mistake of promoting how “investors could expect that efforts by the company and others would lead to an increase in value of the tokens. The company also emphasized it would take steps to create and support a secondary market for the tokens,” the SEC detailed, noting these suggestions makes Munchee fall squarely under the agency’s purview.
Though the SEC effectively destroyed the ICO and their business, Munchee was spared further punative action by the agency. The company “stopped the ICO quickly, immediately returned the proceeds before issuing tokens, and cooperated with the investigation.”
The agency deemed the tokens an “investment contract,” and seemed to imply companies who write glowingly of their own product are some way fraudulent.
The company cooperated without admitting to wrongdoing.
Former Coin ETF Attorney Turns SEC Director
Two months after Mr. Clayton’s appointment to head the agency, he personally named Dalia Blass Director of its Division of Investment Management. Ms. Blass’ key positioning was heralded by some crypto enthusiasts because she served as counsel from Ropes & Gray to the failed Winklevoss efforts at a regulatory-approved ETF. Bloomberg referred to Ms. Blass as an “ETF specialist.”
Her first published remarks were keynote to the “2017 Securities Law Developments Conference” on 7 December, hosted by the Investment Company Institute in Washington, DC. Speakers included U.S Treasury, Fidelity, Prudential, T. Rowe Price, Schwab, Vanguard, among others.
She focused on two initiatives, one investor-centered and one fund related. For investors she is seeking more transparency and engagement by funds, more information to help them make better decisions. The second part of her talk focused upon fund boards and how they can manage to return shareholder value while at the same time complying with complex regulation. In both cases, she urged professionals to team with her division.
In her conclusion, she turned to the issue of a new asset class, cryptocurrency funds. The SEC, she said, has questions. “For example, would retail investors have sufficient information to consider these products and to understand the risks? When thinking about cryptocurrencies and other blockchain offerings as fund assets, are differences in their features important? How would these funds fit into the existing regulatory scheme? What regulatory structure or structures apply to the market for the underlying instrument?,” she posed, ending with a quasi-prediction: “We will be discussing these questions with you as we work through these filings.”
Both Mr. Clayton and Ms. Blass claimed to be speaking only their own thoughts and not that of the agency at large.
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Author: C. Edward Kelso