“ICOs represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi”, an outraged former commissioner of the Securities and Exchange Commission (SEC) told the New York Times in a recent interview.
And at least this much is true: regulators around the world find it maddening that a multi-billion USD market has popped up … without their permission.
SEC Under Pressure from One of its Own
“It’s more than the extent of the violation”, Joseph Grundfest continued. “It’s the almost comedic quality of the violation.”
Mr. Grundfest is a former SEC commissioner appointed in the 1980s by President Reagan.
ICOs are modeled after initial public offerings, but instead of shares of stock investors are holders of digital coins, tokens, which they can use sometimes in commerce or trade (buy and sell). They’re a finance vehicle operating largely as an end-run around legacy banking and mainstream exchanges – often friction-filled with legal and regulatory restrictions, acting as barriers to entry for smaller startups.
This year, the innovative approach to finance has averaged 50 ICOs a month.
Mr. Grundfest is now a professor at Stanford, co-director of the The Arthur and Toni Rembe Rock Center for Corporate Governance, and told the Times, “We’re waiting to see a whole bunch of enforcement actions in this space, and we wonder why they haven’t happened yet.”
A Growing Chorus
He echoes comments recently given by former SEC Chair Arthur Levitt. The “tendency of the SEC has been to stay away from” cryptocurrencies generally. He added he believes the SEC does not “want to take on something as complex from a regulatory point of view as” cryptocurrencies are.
South Korea and China banned ICOs altogether on alleged fears of massive economic disruption.
So far, the SEC has seen fit to go after one ICO, RE Coin. “I hope what they are doing is planning on a sweep of 50 ICOs”, Mr. Grundfest said.
The current Chair, Jay Clayton, remarked, “Where we see fraud, and where we see people engaging in offerings that are not registered, we are going to pursue them because these types of things have a destabilizing effect on the market”, he warned.
Mr. Grundfest, however, is not new to cryptocurrencies, as he’s been thinking about bitcoin since at least 2015 (see video below), considering the tension between when they operate as a currency and when they appear to be a potential security.
“These are not hard cases. You don’t need teams of accountants poring over complex financing documents”, he dismissed in favor of immediate SEC action.
ICO advocates have maintained they’re a world away from traditional securities, as their products are usable in the real-world to purchase goods and services.