With over 1 billion raised, initial coin offerings (ICO's) are gaining a lot of attention these days but much of it may be unwanted. For each successful coin campaign it seems increased concerns of fraud and regulatory scrutiny are close behind. Last month both the SEC and FINRA issued investor alerts which we discussed here. In response to growing concerns, the SEC has also just announced the creation of new cyber task forces: the "Cyber Unit" and "Retail Strategy Task Force" aimed at detecting and investigating cyber threats, and preventing misconduct. This includes the monitoring of threats related to block chain transactions and ICO related scams. This week Britain's Financial Conduct Authority also released an alert warning investors of the high potential for fraud, labeling coin offerings "very high risk speculative investments". In its alert, the FCA stressed that these investments should only be undertaken by highly skilled investors, highlighting their potential for fraud, high volatility, lack of regulation and lack of investor protections.
These concerns were recently demonstrated by an SEC case against two companies: Recoin and DRC World. In its case the SEC asserts both companies, run by Maksim Zaslavskiy made false claims by marketing themselves as being backed by real estate and diamond investments and drastically over inflating the raises of each company. The companies falsely represented themselves as larger operating companies, when they were engaged in no real operations (with DRC operating as a shell company) and no investments made on behalf of the coin investors.
The high risk nature of coin offerings has resulted in foreign governments taking aggressive measures. Last month China issued a ban against any and all ICOs - declaring them a form of illegal financing, with South Korea recently following suit in also deciding to ban such offerings. Both of these bans resulted in a brief crash of bitcoin leaving many fearing that the future of cryptocurrencies themselves may be at risk. Where the SEC in the US (and the FCA in the UK) have deemed ICOs potential securities (subject to regulation), China has made no such determination and South Korea has claimed they are not securities which may create difficulties in regulating them moving forward. It's also uncertain whether these bans will be permanent or temporary.