NEW YORK: America’s chief financial regulator is warning investors against cryptocurrency scams, saying trading and public offerings in the emerging asset class may also be in violation of federal securities law.
The statement by the chairman of the U.S. Securities and Exchange Commission (SEC) Jay Clayton came just hours after the U.S. securities watchdog stepped in to stop an “initial coin offering” (ICO) from a restaurant review app, after the company failed to register it as a security.
Clayton’s comments come as bitcoin is rapidly gaining value, attracting attention from more traders hoping to cash in. On November 29th, bitcoin passed $10,000 in value, a more than 933 percent surge from the beginning of the year. By December, bitcoin had soared past $15,000 and is worth around $17,000 as of press time.
“I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers, and apply good common sense when doing so,” Clayton said in the statement. The statement comes attached with a list of recommended questions the SEC encourages traders to ask before investing, including, “Where is my money going?” and “Is the blockchain open and public?”
ICOs allow startups founded on cryptocurrency technologies such as blockchain to quickly raise capital by issuing virtual tokens to investors. Such offerings have become more common in the past year, but little data about them is available because the market has been largely unregulated.
Monday’s enforcement action was significant because it showed SEC would step in to address ICOs for registration violations even if there were no claims of fraud, according to SEC officials.
“A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that … there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation,” Clayton said.
“If an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost,” he told investors in the statement.
Clayton also warned industry professionals that ICOs in many cases would need to comply with federal rules governing the issuance of securities, including registering with the SEC or qualifying for an exemption that allows issuers to sell shares privately to accredited investors.
He added that many platforms trading in cryptocurrencies may also be in violation of laws that require them to register as an exchange, or an alternative trading platform.
– ‘Digital gold’ arrives –
Bitcoin’s breakthrough is the latest in a spectacular run for the online money dubbed “digital gold” by its advocates, which began life in 2009 as a bit of encrypted software supposedly written by an unknown coder with a Japanese-sounding name.
What began as the preserve of computer nerds and financial experts has gained a broader following among those seeking alternatives to traditional investments, and now can be used to pay for a pint in a London pub or a manicure, as well as to invest in startup ventures, and its valued has soared in recent weeks.
Investor interest has also risen in other digital currencies, such as ethereum, ripple and litecoin, which employ the same “blockchain” software foundation as bitcoin.
“The level of interest is unbelievable,” said Timothy Enneking, founder and the primary Principal of Crypto Asset Management, an asset and fund management company that created a digital currency index.
“We get dozens of people contacting us each day to know how to invest in cryptocurrencies and we don’t even do any marketing.”
Fidelity Labs, part of the giant Fidelity Investments, has been active in bitcoin for four years, said managing director Hadley Stern.
“It really started with our executive team starting to see what was going on in bitcoin,” Stern said.
“And then we became very interested in the underlying blockchain technology. The root of it was this transformational ability to transfer value from software to software alone.”
But investors are also mindful pitfalls given the Wild West nature of the market. Regulators have increasing scrutiny of initial coin offerings (ICOs), a key fundraising tool for cryptocurrency fundraising.
The US Securities and Exchange Commission on Monday halted the ICO by blockchain-based food review service Munchee, that had been seeking $15 million, after concluding that the company was attempting to sell securities without the required registration.
The SEC last week shut down another ICO, charging fraud against Dominic Lacroix, a Canadian with a history of securities law violations, and his company PlexCorps, charging the company that took millions from investors, “falsely promising” a speedy, 13-fold profit.
“For the amount of bullishness surrounding cryptoassets, there appears to be an equal amount of doubt surrounding the vast majority of ICOs.”