The SEC has recently declared two different ICOs to be fraudulent which sparked debate about ICO regulation among Fintech experts.
The Securities and Exchange Commission (SEC) recently charged two different Initial Coin Offerings (ICOs) with defrauding its investors. Both ICOs belong to businessman Maksim Zaslasvskiy. The first ICO, REcoin, advertised itself as the world’s first cryptocurrency-backed real estate company. The second ICO, DRC World, claimed to be a diamond company.
The SEC has accused Zaslavskiy of selling unregistered and non-existent coins and tokens to unsuspecting investors. Zaslavskiy was accused of misleading investors, claiming that they could expect sizable returns from each ICO, while also being dishonest in how their money will be spent as well as how much money has already been invested. Since this discover, the U.S. government has obtained an emergency court order in order to freeze all of Zaslavskiy’s assets, as well as those of his companies. The SEC intends to prosecute Zaslavskiy.
While this does appear to be the first documented ICO, financial experts believe that it definitely will not be the last. Many experts in the industry, as well as governmental agencies, have expressed concern over how ICOs will be regulated to protect potential investors. Current market developments suggest that we may soon experience a surge in fraudulent ICOs, especially in this time when there still is no existing policies to regulate it. SEC spokesperson, Andrew M. Calamari, echoed this sentiment when he cautioned investors to be wary of companies promising unrealistic returns on investment.
ICOs have captured the attention of ambitious investors and criminals alike. With its rising popularity, investors will be eagerly looking for worthwhile ICOs to pour their capital in. Similarly, criminals are likely to take advantage of this, which is a fairly easy process considering that ICOs are still highly volatile and are not regulated by financial institutions.
The Financial Market Supervisory Authority (FINMA) recently confirmed that they have seen a marked increase in ICOs in Switzerland. Since the increase, FINMA has been dedicated to both guiding investors to safe ICO investing practices as well as striving for a way to find a regulatory system for ICOs.
FINMA recently published a report 'FINMA Guidance 04/2017' which focuses on ICO investment practices. While this report acknowledges the innovative blockchain technology that is enabling ICOs, it also emphasizes the importance of finding an adequate regulatory board to protect future investors. Currently, there are no regulatory policies in place anywhere in the world.
The rule of thumb most traders and businesses are currently using is to treat ICOs as they would any traditional stock or currency. However, as the FINMA report points out, this is inadequate as the technical and functional qualities of ICOs and traditional stocks and exchanges are vastly different. Another added difficulty in creating regulations for an ICO is the fact that every ICO is structured differently and therefore cannot all adhere to a single regulatory policy.
According to FINMA, the main concerns when it comes to ICOs will be:
- Provisions on combatting money laundering and terrorist financing.
- Breaking law provisions.
- Provisions on security trading.
- Provisions set out in collective investment scheme legislation.
Until such time when there is a regulatory board or policy in place, both FINMA as well as many other financial experts have cautioned potential investors to be careful when investing in ICOs.