About a week ago, the cryptocurrency world received a bit of a nasty surprise. The SEC had officially confirmed it was looking into regulation of cryptocurrency ICOs. A new statement from the American agency clarifies just what it is trying to achieve in the long run. The SEC is mainly concerned with the risks these ICOs pose, including fake pitches and hard sells. It is a stark warning, but does not bring us closer to ICO regulation just yet.
SEC Continues to Eye Cryptocurrency ICOs and Their Risks
Everyone who has ever looked at a sales pitch for a cryptocurrency ICO will acknowledge there are some real risks associated. In most cases, users send funds -in Ethereum- to a smart contract address and receive X amount of tokens in return. Once the company raises enough money, the ICO is over and the future development of the project can begin. However, there is no real commitment for those companies to complete projects, as their money is residing in the smart contract they created. If they fail to deliver on their promise, there is no real penalty for doing so.
So far, it seems there is no such “scam” to speak of just yet. However, the SEC warns people about the potential dangers in their latest statement. The organization has some key concerns over this trend. Since virtually none of these cryptocurrency ICOs are registered with the SEC, none of them are officially recognized by the state. That means investing in such an ICO will reduce the person’s chances of recovering funds accordingly. Non-registered projects are not covered by the federal securities laws, which means the money is pretty much gone. This is not an ideal situation for any ICO investor.
Additionally, the things that concern the SEC is the most is how these cryptocurrency ICOs are organized. In most cases, investments on such a scale are only accessible by accredited investors. In the world of ICOs however, those exemptions hardly ever exist. Any project which deems itself exempt from registration should be treated with the utmost caution, according to the SEC. After all, investors have no idea what their money will be used for exactly. A development roadmap or white paper will explain a lot, but it is no official guarantee or promise whatsoever.
Furthermore, the SEC wants investors to legitimately ask themselves the question as to how they can get their money back if needed. Most cryptocurrency ICOs have a refund mechanism in place for unsatisfied investors. In a lot of cases, it will take a lot of time and effort to get your original investment back. This is a big problem that does not exist in the regulated world, as investors can always get their money back in one way or another. Thankfully, investors can often resell their tokens on exchanges to recover the money if needed.
There are plenty of other things to be wary of when looking at cryptocurrency ICOs. Investors need to ponder whether or not the project’s blockchain is open and public, if the code has been published, and whether or not an independent audit has occurred. That last part is often a requirement to get the tokens listed on the big cryptocurrency exchange. Not all projects go through those motions and will not see their tokens listed as a result. It is a major pitfall for investors when that happens.
In a way, it is good to see the SEC focus on cryptocurrency ICOs. These projects attract a lot of money and investors from all over the world. However, imposing regulation will make them far less appealing to US investors. It will be interesting to see how this situation plays out over the coming months and years. Right now, most ICOs dissuade US investors from investing, for obvious reasons. That situation may not necessarily change anytime soon.