ICO Regulation Expected to Increase in 2018

ICO Regulation Expected to Increase in 2018

As ICOs — initial coin offerings — gained momentum in 2017, regulators are expected to take more enforcement actions in 2018 despite certain legal ambiguities.

Last July, the U.S. Securities and Exchange Commission issued guidance after investigating an ICO, declaring that it will regulate such offerings on a case-by-case basis. Aided by a newly formed cyber unit, the regulator subsequently pursued a string of enforcement actions and already has pursued several cases this year.

SEC Pursues Registration Regulation

So far, the SEC has targeted issuers who market the prospects that their token will appreciate in value. In December the regulator shut down a $15 million ICO by online food review company Munchee Inc. for failing to register its offering or obtain a qualifying exemption. The case highlighted part of the SEC’s stance on ICO regulation; instead of alleging fraud or pursuing penalties, the SEC focused on the company’s failure to register its offering.

In an ICO, the issuer sells digital tokens to investors to help fund certain projects in exchange for digital currency or fiat currency. The tokens can represent access to a company’s services or an equity interest that can be traded on the secondary market through various online platforms.

For a token to be considered a security, the SEC says that it should satisfy all four parts of the so-called Howey test, named for a 1946 Supreme Court decision that determined what is an investment contract. The Howey test says an investment contract involves a person investing money in a common enterprise, expecting profit that is derived mainly from the efforts of others. According to the SEC, token sales that satisfy Howey criteria should either be registered or their issuers should obtain a qualifying exemption. To date, the agency said no ICOs have been registered.

CFTC Also Weighs in On ICO Regulation

While the SEC is sorting out jurisdiction and regulation, the U.S. Commodity Futures Trading Commission (CFTC) has announced that coins issues in ICOs can be considered commodities. Like the SEC, the CFTC said it will also take a case-by-case approach in determining where oversight of ICOs is warranted.

ICO Regulation to Focus on Lack of Safeguards

As ICOs grow this year, regulators have focused on the lack of safeguards. Unlike traditional securities markets, ICOs have less investor protection and greater opportunities for fraud and manipulation. So far, the CFTC has announced several cases of cryptocurrency fraud, with three cases brought in one week earlier in January.

On the heels of these announcements and expectations of future ICOs, experts expect regulators to step up oversight in 2018.

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