Initial coin offerings have been sparking concerns among lawmakers and regulators lately, who call for tougher rules to be applied to this new approach to fundraising.
New companies and smaller projects are using this method of crowdfunding through crypto online currencies, and while many of these offerings are well-intentioned, some of them have weak security which makes them prone to being hacked, and the others are just pure scams. All of this led for lawmakers and regulators to try and do more for investors and consumers’ protection.
The Securities and Exchange Commission is already taking notice. On Tuesday, an investigation has been made public conducted on digital coins sold by “The DAO” — an online leaderless group that used a cryptocurrency called Ethereum.
This group was a target of an attack in May 2016 which was so vicious that it destroyed the group and the value of its coins, leading many to lose money.
In the report made by the SEC, they said that DAO offered coins that were actually securities — publicly tradable debt like bonds. And the agency said U.S. securities laws may apply to the tokens.
The agency said DAO users were investing money in the coin offerings with the expectation of making profits, and because DAO tokens were securities, the group needed to register with the agency as an exchange.
Still, the SEC chose against punishing DAO, because of the novelty of the situation, but warned that in the future, any sale of the security must be registered.
This move made it obvious that the SEC is carefully studying cryptocurrencies and initial coin offerings. They have also offered to help investors how to determine if these ICOs are safe and legal.
In their report, they stated that investors should make sure to check if a coin offering is registered properly in case it exchanges security and suggested investors to learn about their rights and level of control and to understand potential cybersecurity threats.
The Tuesday report has also made it clear that the SEC has changed the way they are handling digital currencies. The agency has been watching the trade for a while but stayed out of it when the two largest currencies, Bitcoin and Ethereum have gained market value during last year. There’s also been an explosion in the number of initial coin offerings using those currencies.
Industry and advocacy groups for digital currencies have approved of the SEC’s engagement.
Peter Van Valkenburgh, the director of research at Coin Center, said he was glad the agency was looking into this. He also added that his organization has given advice to the SEC on digital currencies, at the same time as the agency is going its own research and expanding the knowledge on the issues.
He believes that the next step for regulators should be making an example of a bad actor and start monitoring the scam offerings.
ICOs are also getting the attention of lawmakers on Capitol Hill, including Rep. Jared Polis who said that there will always be good and bad players in any financial sector, and added that because of the ICOs becoming very widespread, there are new ways to make capital.
The way it works is that startups and small companies can make money from ICOs by offering digital coins while investors purchase the tokens to help finance the project.
Still, the value of the tokens is different from business to business, and the coins do not have to represent a share of the said business in the same way as an equity stake.
In some situations, token investments are entirely speculative and can yield their buyers a share of the company’s expected revenue. In other cases, the tokens are essential to the startup’s operations.
Coin Center says believes regulatory policies should take into account the different types of ICOs.
Valkenburgh and Polis are hopeful for a light regulatory touch, but still want more protections for investors.