United States Is Cracking Down On ICO Fraud — Operation Crypto Sweep Has Begun
On Monday, North American Securities Administrators Association (NASAA) announced one of the largest coordinated series of securities enforcement actions ever. If you have been following the crypto space over the last two years, this should not come as a surprise. In fact, this weeks actions were inevitable. Still, the scope of this so-called ‘Operation Cryptosweep’ is massive.
The hunt is on
For some time, regulators have been issuing warnings to investors and issuers to be careful. The Securities and Exchange Comission (SEC) set up a special Cyber Taskforce. Recently, they even launched a fake ICO website to teach investors a lesson. What a time to be alive.
This week’s actions however, came from the SEC’s smaller brothers and sisters at the state level. Although these regulators get far less attention in the ICO space than the SEC, they too have jurisdiction to combat securities fraud.
Working together in the North American Securities Administrators Association (NASAA), these state regulators launched ‘Operation Cryptosweep’, which to date has resulted in nearly 70 inquiries and investigations and 35 pending or completed enforcement actions related to ICOs or cryptocurrencies since the beginning of May. And, as NASAA President Joseph Borg has stated:
“The actions announced today are just the tip of the iceberg.” — Borg
What’s the deal?
Many projects in the crypto-space started using a new way of fundraising, Initial Coin Offerings (ICOs), to fund their businesses. In an ICO, a business sells crypto-tokens to retail investors. Any funds raised during the sale are subsequently used to develop the underlying platform / business where the tokens can be used. Investors hope that, once demand for the utility of the platform increases, the value of the token increases as well, as the supply of tokens is limited.
There are, however, a number of problems with this practice:
- Information asymmetries between issuer and investor
- Lack of guarantees that the issuer’s promises will be fulfilled
- Fraudulent issuers that scam investors out of their money
Of course, these problems are not new. In fact, they are the reasons why we have developed securities legislation over the last 80 years. When one sells an investment contract (such as a token), he generally has to register with the relevant securities regulator and provide certain information to investors in the form of a prospectus. For ICOs however, this rarely happens and many issuers are thus committing borderline securities fraud. As such, an initial batch of over 30 Cease and Desist letters have been sent to ICO issuers, with more investigations and enforcement actions on the way.
Inquiry Into Crypto-Exchanges
It should be noted that the sights of the regulators are not merely aimed at ICO issuers. Notable are the the information demand letters that have been sent to crypto exchanges. According to the letters, the platforms often lack the basic market protections of traditional investing platforms. At the same time, the extent of disclosures to customers about trading rules, internal controls, and other basic practices varies from platform-to-platform, making it difficult or impossible for prospective users to evaluate the actual risks of trading on a particular platform. Therefore, Attorney General Schneiderman has requested the exchanges to fill in this three page questionaire.
Below you will find the list of exchanges and ICO issuers against which actions have been taken.
List of targeted exchanges
Edit: List does not properly display everything. Here is the rest:
- Gemini Trust Company
- Huobi Global Limited
- iFinex Inc. (Bitfinex)
- itBit Trust Company
- Orca Alliance
- Payward, Inc. (Kraken)
List of targeted ICO issuers
About the Author:
Thijs Maas is a LLM student with a healthy obsession for the legal challenges that arise in relation to the wave of innovation brought by distributed ledger technologies. He launched www.lawandblockchain.eu, a website that acts as a hub for information, insights and academic research on the subject.