The SEC ban on Thursday last of three companies from trading in the wake of similar statements made by all three companies about acquisition of blockchain and cryptocurrency related assets has perhaps come at a time when the number of scams on the crypto markets is on the rise. The SEC ban however is temporary, coming into effect on 16th February, 2018 and ending on 2nd March, 2018. All the three companies banned from trading are listed on the OTC exchange as independent businesses with market cap of $5 million each.
SEC ban aims at protecting shareholder interests
Companies listed under the Securities Exchange Commission are prevented by law from entering transactions that would potentially dilute shareholder interests. Interestingly, all the three companies affected by the SEC ban have the same promoters and that has possibly raised more concern for the SEC. Considering the recent high octane volatility in the crypto markets and many small companies raising millions or, rather several millions of dollars and most of it coming from ordinary investors, the SEC ban could potentially have far reaching implications for the crypto markets.
Rising popularity of Altcoins and the potential dangers
Although, most of us have known for ages that the credit for inventing Bitcoin goes to Satoshi, Nakamoto, in 2016, an Australian entrepreneur Craigh Wright has claimed that he is the actual person who invented Bitcoin. While we have not come across any apparent denial of Craig’s claims, he is unlikely to have imagined the huge popularity of the underlying technology, Blockchain technology and therefore the spate of altcoins, or other digital currencies similar to Bitcoin. In 2018, there are about 1400 cryptocurrencies actively traded through different exchanges across the globe. While many of the altcoins which is the collective name for all cryptocoins other than Bitcoin, do have some very impressive projects adopted by leading global businesses, there are also the black sheeps within this herd.
To comprehend the impact of the SEC ban on the crypto markets, let us briefly understand how an ICO works.
An ICO is in many ways similar to an IPO or initial public offering made by companies listed under a Securities exchange for raising money from public investors. An ICO typically lasts a few hours or in some instances a few weeks and the company invites investors to buy the tokens (also called digital coins) in order to fund its project. The projects in turn are based on the blockchain technology, like in the case of Ethereum where the program runs across several computers to generate a digital ledger that is tamper proof. The software can also be designed to execute tasks like smart contracts or for making investments.
Individuals interested in participating in the ICO, use digital cash like bitcoin or even credit cards in some instances through a website owned by the company offering the ICO and digital tokens are issued to the investor.
Tokens empower the holder to participate in the blockchain activity of the particular coin/token. For example an ICO may be focused on offering access to an automated investment option or certain services under cloud computing. But, these tokens can also be sold or bought through secondary markets and even exchanged for bitcoin or cash through websites offering the facility.
What triggered the SEC ban?
For long, warnings have been coming from ICO skeptics that in a number of instances, token sales simply constituted a new way of issuing shares and therefore selling them without obtaining a license was in contravention of securities laws laid down by the federal government. The SEC ban therefore is merely a confirmation of that. The agency also added that at least one among the recent ICOs was indeed an offer of securities.
What did the SEC ban state?
The SEC ban follows an investigation into a German corporation under the banner “The DAO”, or Decentralized Autonomous Organization which raised as much as $150 million through ICO in the preceding year. Investors were invited by DAO to buy its tokens which would bring them rewards from an automated strategy in investments. Christopher Jentzsch, who was one among the individuals leading the ICO process even claimed that the rewards promised was similar to receiving dividends from companies listed as securities. Therefore, the SEC concluding the ICO as a security comes as no surprise.
While the SEC’s conclusion applied only with regard to DAO, the ruling does provide certain additional guidance in respect of ICOs and noted that the facts and specific circumstances of individual cases will determine if an ICO can be reckoned as securities. The SEC report also serves to reiterate the fundamental principles governing US federal laws on securities and elaborates how they could apply to virtual organizations and other entities using blockchain or distributed ledger technology for raising investment/capital and a related offer for selling securities. The report adds further that, automation of some functions using technology like ‘smart contracts’ or computer programs, does not remove such conduct from the ambit of the securities laws laid down by the US federal government.
Why are scams successful
The SEC ban also brings into focus another important aspect which is the success rate of many scams. In the instant case, the SEC ban has helped in clipping the wings of some potential fraudsters. But, in a number of instances across the globe, the fraud perpetrated on gullible investors come to light only after serious damage has been done and individuals operating the scam get away with large sums of money giving precious little in return to the investors. Human greed and the absence of due diligence is the main reason behind the scamsters getting away with their fraudulent ways.
Some people think the SEC ban is a flash in the pan
Some people hold the view that the SEC ban is merely a flash in the pan and that the crypto world is resilient enough to take such mild quakes. But, if you refer to one of our earlier articles here, you will be convinced that governments across the globe, including the U.S. are getting more and more concerned about cryptocurrencies.