SEC warning on dodgy fundraising brings wave of digital-currency debuts back down to earth

Source:Global Times Published: 2017/7/30 17:28:40

The ballooning market for so-called initial coin offerings (ICOs) - which has boomed to $1.3 billion so far this year - just got a reality check. The Securities and Exchange Commission (SEC) has decided that last year's largest sale of crypto-currency tokens, reminiscent of an initial public offering of shares, was indeed a sale of securities and should have complied with US laws governing the process and protecting investors.

The SEC is letting the blockchain whizzes behind The DAO, which raised $150 million in ether, the digital currency of the Ethereum platform, off the hook this time. But the Wall Street watchdog's report sends a strong signal to the ICO market and should deflate what was looking like an issuance bubble.

The regulator didn't announce a broad crackdown, but it made clear that when ICOs are similar enough to securities offerings they fall under registration, disclosure and other requirements that apply to stock and bond issues. The DAO tale had a particular twist in that more than a third of the proceeds were stolen by hackers, but that's largely beside the point. As well as alerting issuers about regulations, the SEC warned investors to be wary.

ICO practitioners had been awaiting an official ruling. Tuesday's report from the SEC will surely crimp the market for a time. But much remains uncertain. It may be that blockchain startups needing funds will find that, with the additional red tape, ICOs don't provide much if any advantage over crowdfunding, venture capital or even traditional initial public offerings of stock.

On the other hand, the technology surrounding crypto-currencies is potentially powerful and even for funding purposes it may have certain advantages over cash.

The test for those who believe in it will be in turning a dodgy fundraising market into one that's both legitimate and useful.

The author is Timur Onder, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews.

Posted in: INSIDER'S EYE

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