US SEC Chairman Clayton Keeps Quiet on ICO, ETF Regulation Updates

The chairman of the U.S. Securities and Exchange Commission (SEC) Jay Clayton reiterated the regulator’s strict stance on Initial Coin Offering (ICO) compliance in fresh comments to CNBC Nov. 26.

Speaking in an interview with CNBC, during which presenters mentioned the recent enforcement deals with ICOs Paragon and Airfox, Clayton underlined the need to conduct public token sales with U.S. consumers in line with SEC guidelines.

“We’ve had no ICOs register [with the SEC],” he told reporters, adding:

“To the extent that an ICO is being conducted offshore or pursuant to a private placement exemption, fine; to the extent that you’ve conducted a public offering in an ICO, it’s non-compliant.”

Both the SEC and fellow regulator the Commodity Futures Trading Commission (CFTC) have adopted the perspective that while Bitcoin (BTC) is not considered a security, various ICO tokens are, subject to individual scrutiny.

“I think we’ve been clear that Bitcoin isn’t a security, but many of the ICOs that you see and talk about – they are securities,” Clayton added.

Continuing, the conversation touched on other pertinent issues affecting the cryptocurrency industry this year such as the pending decision on whether to allow Bitcoin exchange-traded funds (ETFs) to launch.

On all topics, Clayton remained tight lipped, repeating aspects of the SEC’s stance already known to the wider community.

“I’m not going to comment on timing or anything like that, but we’ve been clear on some of the issues that are of concern to us,” he said.

Paragon and Airfox, which in 2017 raised around $27 million from their ICOs, must now repay millions of dollars to investors in addition to fines after regulators found them guilty of selling unregistered securities.

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The Making of the First US ICO Fraud Case

In common law systems, it is precedent that informs judicial approaches to new and previously unaddressed matters. The precedent that will likely shape the body of U.S. case law on fraudulent initial coin offerings (ICOs) is currently being forged in a federal court in the New York borough of Brooklyn, where a 39-year old entrepreneur, Maksim Zaslavskiy, has pleaded guilty to committing securities fraud.

The development that will most likely result in a landmark decision – the jury will gather in April 2019 to decide on a sentence – is yet another twist of a now 14 month-long effort, involving both the U.S. Department of Justice and Securities and Exchange Commission (SEC). Previously, the process has already yielded a fateful ruling by a federal judge who in September established that securities law is applicable to ICO-related cases.

The case that is poised to become so consequential for the whole ICO space deals with two ventures that neither issued a token nor developed any blockchain-powered infrastructure: REcoin and Diamond Reserve Coin both only existed on paper. Yet it also makes perfect sense that the authorities first went after the most brazen instances of ICO fraud, the ones that hurt rookie retail investors the worst and inflicted the most reputational damage on the industry.

When the SEC first filed a complaint against Zaslavskiy in a federal court in September 2017, it was estimated that REcoin and Diamond Reserve Coin ICOs resulted in around 1,000 investors losing some $300,000. Having fallen for Zaslavskiy’s aggressive marketing campaign, these people were led to believe that they either invested in a digital asset that was backed by real estate located in developed countries (REcoin), or purchased a tokenized membership in an elite club for wealthy business people, with physical diamonds in the company’s custody underlying the value of tokens.

In fact, though, they were buying “worthless certificates,” as U.S. district attorney, Richard Donague, put it, on Nov. 15, 2018, Zaslavskiy admitted in his guilty plea: “We had not yet purchased any real estate.” He now faces up to 5 years in prison, pending the decision of a jury panel. The regulator is also filing a civil lawsuit against Zaslavskiy.

The making of a fraudster

The Ukrainian city of Odessa, overlooking a scenic coastline of the Black Sea, is known for its vibrant spirit and unique culture. Throughout both the Imperial and Soviet periods of its history, the city has been home to a large Jewish community. As the final years of the USSR saw the liberalization of immigration policies, many Odessan Jews chose to leave for either Israel or the West. Born in Odessa, Maksim Zaslavskiy was 12 when his family relocated to the U.S. While Maksim was destined to make ICO history, his brother, Dmitry, chose a banking career and later became an executive director for Morgan Stanley.

Zaslavskiy’s social media pages, as well as websites of many organizations he ran at various points of time, were either deleted or became unavailable in the wake of the high-profile investigation into his activities. The main source of information about his pre-trial life is now the four-hour interview to the SEC representative that he gave in September 2017, of which the Fast Company magazine managed to obtain a transcript.

In 2003, Zaslavskiy received his degree in finance from Baruch College, followed by a LLM from Yeshiva University’s Cardozo School of Law three years later. He worked as an IT consultant for several banks before starting his own international business, whose nature is difficult to infer from the interview. Zaslavskiy also claimed to have been involved in real estate business since the age of 18, yet Fast Company’s investigation failed to verify his employment with the firms he claimed to have worked for.

According to the interview, the 2008 crisis became a major blow for Zaslavskiy’s business, further entrenching him in his resentment of the U.S. financial system. He turned to charity work, founding a philanthropic organization called Live Love Laugh. However, it is impossible to say whether the ambitious statements on its website (which is now down) were ever backed by any real actions, since the entity appears to never have been properly registered.

Zaslavskiy has also written at least three books (under the name Avi Meir Zaslavsky) that can be still found on Amazon. These are how-to guidebooks on the ins and outs of real estate business. Another one, which appeared around the time his two ICOs were in full swing in August 2017, sets out to explain the reader that “what you perceive and use as money is designed in such a way that the wealth created by the economy truly benefits only large banks and multinational corporations.”

Apparently, the book was meant to lend credibility to Zaslavskiy’s claim for intellectual leadership in the crypto space, as its press release presents him as “one of the world’s leading currency decentralization proponents.” The publicity campaign around the book provides a glimpse into Zaslavskiy’s approach to marketing himself and his ventures: bold, extravagant, overblown. Unsurprisingly, this style carried over to the way his two ICOs were presented to potential investors.

Real estate tokens and Initial Membership Offerings

For someone disenchanted with both the traditional financial system and traditional means of making money, the ICO rush of 2017 presented innumerable opportunities. The beauty of the ICO model was that it opened up the world of venture capital, previously reserved exclusively for professional investors, to anyone with a few spare dollars and some interest in the uncharted space of blockchain applications. The flipside of it is that some of the newcomers were unable to tell legitimate projects from outright scams replete with red flags.

Megalomaniac language and exaggerated promises are usually telltale signs of something not being right with the venture that’s taking off. Zaslavskiy’s projects had both. REcoin, announced in June 2017, presented its founder as a “Real Estate guru” and proclaimed that the 101REcoin Trust held properties “in developed and stable economies like the USA, Canada, Japan, Great Britain, and Switzerland” without providing any evidence in support. Also, an “international team of attorneys and programmers” was allegedly there to “work tirelessly” on increasing token holders’ fortunes. As the court proceedings later revealed, no such team ever existed.

In August, after facing the first signs of SEC interest to REcoin, the “Entrepreneur, Philanthropist, and Author Max Zaslavsky” began his marketing campaign for an allegedly diamond-backed digital asset, the Diamond Reserve Club token. The release (beginning with “If the Holy Scriptures have taught us anything at all…”) touted a brand new Initial Membership Offering model, which was supposed to tokenize investors’ participation in a large ecosystem of interconnected businesses. It also suggested that the tokens could be inherited by the investors’ grandchildren.

One would think that the theatrical language and gargantuan assurances of the two ICOs’ public-facing documents would only make any reasonable person scoff. Yet from July through September Zaslavskiy and his accomplices managed to amass around $300,000 before the SEC took the matter to court.

The fallout

On Sep. 29, 2017, the SEC brought a civil complaint to the U.S. District Court for the Eastern District of New York against Zaslavskiy and his two companies for violating U.S. securities laws. Recoin and DRC responded on their websites with a joint statement that argued that it was due to “lack of legal clarity as to when an ICO or a digital asset is a security,” suggesting that their operations were not within the SEC’s purview.

However, the Feds seemed to disagree. On Nov. 1, Zaslavskiy was apprehended by FBI agents and criminally charged with a conspiracy to commit securities fraud. In early December, he pleaded not guilty and secured a $250,000 bail backed by his family’s Brooklyn house. In February, Zaslavskiy’s defense filed a motion to dismiss the indictment on the grounds of inappropriate application of securities law to cryptocurrencies. Yet both the DoJ and SEC insisted that REcoin and DRC tokens passed the Howey test – a legal standard that determines whether a contract is a security.

In September, U.S. district judge Raymond Dearie concluded that for the purposes of the case, the tokens could, indeed, be treated as securities, potentially setting a precedent that could shape the future of ICO regulation. The judge was also unequivocal in characterizing the nature of Zaslavskiy’s enterprises:

“Stripped of the 21st century jargon, including the Defendant’s own characterization of the offered investment opportunities, the challenged indictment charges a straightforward scam, replete with the common characteristics of many financial frauds.”

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ICO Performance in Q3 2018 Saw ‘Overall Disappointment,’ Study Shows

Initial Coin Offering (ICO) performance was in part characterized by “overall disappointment” in the third quarter of 2018, according to a study from ICO analysis firm ICORating published Nov. 15.

As the report states, Q3 2018 saw 597 ICOs raise over $1.8 billion, a notably lower value than the over $8.3 billion reportedly raised in the previous quarter. A similar decline in investment has been reported in traditional Venture Capital (VC) funding for blockchain projects.

In the report, the decline in funding is accompanied by a median return on investment (ROI) of -22 percent in Q3 2018. As the report states:

“The same indicator was +49.32% in the 1st quarter and −55.38% in the 2nd quarter.”

Regulation is in part cited as a cause for the downtrend, with the increasing crackdown on this fundraising method by the U.S. Securities and Exchange Commission (SEC) putting “hundreds” of projects at risk.

In June of this year, the SEC’s chairman stated that while Bitcoin (BTC) is not considered a security, most ICO tokens probably are, requiring their issuers to register with the Commission.

During Q3 — from July to September 2018 — ICO funding overall has fallen by 48 percent. A more significant fall of over 78 percent was reported in September — the last month of the third quarter — when compared with May, the middle of the second quarter.

ICO funding and success. Source: ICORating

ICORating’s report also stated that 57 percent of ICO projects that raised funds in Q3 were not able to secure over $100,000.

Of all the tokens sold to investors during an ICO in Q3, just 4 percent ended up listed on exchanges, compared to 7 percent reportedly listed in Q2 of this year, ICORating notes.

The report also mentions that 19 percent of “projects with previously announced ICOs” in Q3 have deleted their websites and social media accounts, a reported 10 percent more than in the second quarter. Those projects that disappeared after collecting funds attracted 3 percent of the total ICO funding in Q3, which amounts to about $62.1 million, the report states.

The research also covers the stages at which projects tend to start their ICOs: of all the projects included in the study from Q3, 76.15 percent were at the “idea stage” when they ran their ICO – 18.72 percent more than in the previous quarter.

When it comes to the choice of the platform for token sales, Ethereum remains king with 83.75 percent of ICOs choosing to release their token on its blockchain.

Looking more broadly to the last year, the ICO market has been fluctuating, registering two peaks concerning both the number of projects and amount of capital raised in December 2017 and March 2018.

As Cointelegraph previously reported, funds raised by ICOs during October increased 26 percent when compared to September, from $403.1 million to $508.54 million, despite only 54 projects having raised $1 or more.

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ICO Issuers Settle Registration Charges With SEC

The U.S. Securities and Exchange Commission (SEC) has agreed to settle charges with two startups that sold tokens through Initial Coin Offerings (ICOs) in 2017. The companies were charged by the SEC for running their ICOs after the regulator clearly defined such offerings as unlicensed securities in its DAO Report of Investigation. The startups indicted by the SEC are Boston-based Airfox, which sold $15 million worth of tokens, and Paragon Coin, which raised $12 million selling tokens. 

“We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities,” Stephanie Avakian, co-director of the SEC’s Enforcement Division, explained in a release. “These cases tell those who are considering taking similar actions that we continue to be on the lookout for violations of the federal securities laws with respect to digital assets.”

The two cases happen to be a first for the commission where civil penalties were imposed for “ICO securities offering registration violations,” and they follow the commission’s first non-fraud case against Munchee Inc. in 2017, when it stopped the startup’s token offerings and instructed the company to return proceeds to investors.

The companies involved have, however, agreed to settle the case without admitting to or denying the findings from the regulator. Each company will pay a $250,000 fine to the SEC and compensate investors who purchased the tokens. Both startups are also required to register their tokens as securities and to file periodic reports to the SEC.

Steven Peikin, co-director of the SEC’s Enforcement Division, believes the new model affords investors the ability to be compensated for purchasing unregistered securities.

“By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws.”

This is the SEC’s second settlement in less than 30 days. Just last week, it reached an agreement to settle charges leveled against the founder of decentralized exchange EtherDelta, Zachary Coburn. Coburn, who had been accused of running an “unregistered national securities exchange,” agreed to pay more than $300,000 in penalties. As detailed in its end-of-the-year report, 2018 has been a busy year of enforcement for the regulatory agency as it continues to crack down on unregistered cryptocurrency companies.

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Guilty Plea Moves First US ICO Fraud Case to Final Stages, Sentencing Set for April

The suspect at the center of the U.S.’ first Initial Coin Offering (ICO) fraud case has pleaded guilty in court, in part settling a case seen as a bellwether for the country’s securities laws, Bloomberg reported Nov. 15.

Maksim Zaslavskiy, who faces a sentence of up to 37 months after lying to investors who put funds into two ICOs last year, confirmed he had lied about aspects of his operations.

The court case involves REcoin and Diamond Reserve Coin, which had claimed to be backed by real estate and diamonds respectively. Investors lost money when both coins imploded, Zaslavskiy and his accomplices having never in fact secured any of the alleged backing.

“I, along with others, made these false statements to obtain money from investors,” Bloomberg quotes him as telling the court in New York:

“We had not yet purchased any real estate […] we had not purchased any diamonds.”

The U.S. Securities and Exchange Commission (SEC) originally filed charges against Zaslavskiy in September 2017, the case since then becoming a topic of interest among commentators eager to see if the regulator would — or could — class the ICO offerings at hand has securities under its jurisdiction.

As Cointelegraph reported, a U.S. district judge ruled securities laws could apply to cryptocurrencies in September. It would be up to a jury to determine whether those in this case should receive the same treatment.

Zaslavskiy will return to court for sentencing in April 2019.

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France Accounts for Minor Part of Global ICO Market, While US Leads the Industry

The Initial Coin Offering (ICOs) industry in France represents a minor part of the global ICO market, according to a report on ICOs released by French financial markets regulator AMF (l’Autorité des marchés financiers) today, Nov. 14.

According to the recent study, the global ICO market has accounted for 19.4 billion euros ($21.8 billion) since 2014. Having experienced rapid growth since 2016, most of the market share has mainly been concentrated in 2017 and during the first three quarters of 2018, with 13.4 billion euros ($15 billion) raised within this latter period.

As the AMF reported, France has accounted for a small share of the market, with 89 million euros ($100 million) raised in 15 ICO projects, while most of ICOs were carried out in the U.S. According to the study, French ICOs amounted to 1.6 percent of global equity financing in 2017.

Concerning the internal market, the AMF emphasized a crucial role in this new type of fundraising as used by small companies in order to preserve the integrity of their capital. The AMF revealed that local ICO projects are planning to incorporate into other industries and expect to raise up to 180 million euro ($202.6 million).

The financial regulator also stated that the industry needs appropriate regulation with respect to investor protection, stressing the need to adopt effective anti-money laundering (AML) requirements, as well as to provide a due level of transparency.

In this regard, the AMF mentioned the recent initiative by the French Ministry for the Economy and Finance that approved the Action Plan for Business Growth and Transformation bill (PACTE) dedicated to ICOs in September this year, which is now being examined in Parliament. However, the AMF still stated that the industry needs international cooperation in order to regulate the market, given the cross-border character of the industry.

This recent report was released one year after the launch of the UNICORN program, which represents a supportive basis and an attempt to build a regulatory approach to “all new fundraising activity based on cryptocurrencies and Blockchain technology.”

Last week, the Finance Committee of the lower house of French parliament proposed tax amendments that would equate taxes on crypto sales to those on income taxes, reducing them from the current 36.2 percent to 30 percent starting from Jan. 1, 2019.

Earlier in September, the AMF blacklisted 21 investment websites, including crypto-related websites that offered “atypical investments.” Previously, the stock regulator had added 15 other websites to the blacklist in March this year, warning investors about risks associated with online schemes that promise high returns.

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Fraudulent South Korean Exchange Pure Bit Nabs $2.8M in ICO Exit Scam

A South Korean ICO has defrauded its private sale investors out of roughly 13,500 ETH ($2.8 million) before disappearing from the internet entirely.

Pure Bit, which has already pulled the plug on its website, has apparently conducted a fairly routine exit scam for its Pure Coin token sale. The cryptocurrency was pitched as an exchange token for Pure Bit, an exchange that was supposed to launch by the end of the month. The Coin  promised to give investors shares of the exchange’s trading revenue as well as discounted fees for trading, and its anonymous team claimed that it would burn 90% of token supply over a three year period.

A block explorer for the ICO’s Ethereum wallet displays several in-bound transactions from investors beginning on November 4, 2018. On November 9, 2018, however, an initial 500 ether was transferred out, with the remaining 13,178 withdrawn 20 minutes later.

Not all of the evidence of this company’s very existence was destroyed immediately, however. A thread on Reddit captured some of the last moments of the exchange and took several screenshots with translations from the original Korean.

According to Reddit user u/Tbid, who evidently watched the saga unfold, Pure Bit was a crypto exchange that announced an ICO launch of an exchange token. Almost immediately after the ICO ended, however, all of the funds were spirited away to another single wallet address.

As depicted in the attached screenshots, the community admin quickly kicked out every participant in their Kakao chat thread, before sending a final message of “Thank You.” This information was corroborated by a Twitter thread, which added that the admin’s message on their now-defunct Kakao profile was a terse but excessively formal apology.

Between the wallet transfers, suspicious website activity and the admin’s explicit apology, this exit scam is about as by-the-book as they come. Duplicitous activities such as this are a recurring threat in the world of ICO launches, which forms a large part of the reasoning why South Korea banned ICOs altogether.

Having committed a crime even before stealing such vast sums of money, the anonymous administrators of Pure Bit are likely in for some extensive legal troubles. As one commenter in the Reddit thread remarked, the South Korean government is likely to be “hot on their tails.”

Even without the threat of exit scams, South Korean law enforcement is well-used to dealing with routine cybersecurity threats, as the world’s largest crypto hacking syndicate, which is literally sponsored by the North Korean government, has targeted South Korean cryptocurrency exchanges on a number of occasions. 

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Thailand to Legitimize First ICO ‘Portal’ via New Regulation, Says SEC Head

Thailand’s securities regulator will clear “at least one” Initial Coin Offering (ICO) “portal” to operate legally in November, local daily news outlet Bangkok Post reported Nov. 8.

Speaking to the publication, Rapee Sucharitakul, secretary general of the Thai Securities and Exchange Commission (SEC) said that ICOs themselves could also start seeing official approval to serve Thai markets as soon as December.

“At least one ICO portal will be certified in November, then we can approve each ICO offering, which might start in December,” he said.

The confirmation marks the closing stages of Thailand’s final push to formalize cryptocurrency markets, which began with the issuance of a royal decree in May.

Governing all forms of cryptocurrency entities from ICOs to exchanges and broader “digital asset operators,” the legislation demands the SEC vet those wishing to operate in Thailand.

Rapee added a further five such “operators” were currently under consideration by the Finance Ministry.

During the application process, all will continue to operate as normal, Bangkok Post notes, having submitted their original applications within a specified 90-day cooling-off period following the issuance of the May decree.

Once the certification process is in place, however, Rapee signalled that the SEC would remain risk-averse to market entrants.

“We have always warned investors against being persuaded to invest in ICO offerings because they could be scams or they might not have sufficient liquidity to trade,” he added, continuing warnings made last month.

Speaking at the Counter-Terrorism Financing Summit this week, Thailand’s Deputy Prime Minister urged that additional measures be introduced both domestically and internationally to the pending regulatory framework, in order to keep up with new tactics and threats to consumer security.

Earlier this week, on Nov. 5, the country’s Revenue Department revealed plans to use blockchain and maсhine learning to verify the validity of taxes paid and to speed up the tax refund process.

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The Incoming Wave of ICO Regulation (Yes, It’s Coming)

Alex Sunnarborg is a Founder of Tetras Capital. Previously, he was a research analyst at CoinDesk and a founder of the crypto investing app Lawnmower.

As you may know, securities classification analysis in the U.S. today primarily revolves around the Securities Act of 1933 and the SEC v. W.J. Howey Co. Supreme Court case of 1946.

The Securities Act of 1933 was established to require issuers to disclose certain pieces of information to potential investors prior to any public securities offering. This law was enacted to reduce misrepresentation by issuers and to help protect investors, but applies only to the sale of “securities.”

In 1946, SEC v. W.J. Howey Co. broadened the definition of securities by including any “investment contract”, defined as: (1) an investment of money (2) into a common enterprise (3) with the expectation of profit (4) to come solely from the efforts of others.

This criteria has come to be known as the “Howey Test,” and has now been used to evaluate a wide variety of investment schemes. Howey’s own securities sales involved selling real estate and service contracts for citrus groves he owned in Florida.

Combining these two pieces of regulation, the registration requirements defined by The Securities Act of 1933 must be satisfied prior to the sale of any investment contract as defined per the Howey Test of 1946.

71 years after the citrus groves, the SEC used the Howey Test to determine that the tokens sold in The DAO ICO were securities.

  1. Participants in The DAO invested money: ETH (defined as a “virtual currency” like BTC)
  2. into a common enterprise: The DAO
  3. with an expectation of profit: DAO (tokens purchased in the ICO)
  4. deriving from the efforts of management:, the project’s founders, and The DAO’s curators.


  1. DAO tokens were securities.
  2. The DAO ICO was an unregistered securities offering.

Instead of levying action against management, the SEC did not pursue charges.

The ICO boom

At the time of the SEC’s DAO report in July 2017, global token sale fundraising had just crossed $2 billion. Rather than cool the market down, in the next 12 months ICOs boomed and issuers raised over $20 billion (over 10 times the all-time total in just one year).

Almost none of these ICOs were registered pursuant to the Securities Act of 1933.

Moving forward to today, not much has changed. ICOs have not stopped and large rounds continue to be raised both publicly and privately.

Aside from the uncertain regulatory risk, an ICO is nearly a no-brainer for capital hungry entrepreneurs. ICOs have long since trumped VC as the preferred method of raising capital. Why would you bother pitching a critical VC firm when you can collect capital directly from anyone in the world?

Who’s still investing though? Despite many altcoin prices being down 90 percent or more this year, and much of retail feeling exhausted, many venture-style crypto funds were still raised in the last 12 months and thus are nearly forced to make large bets in new early stage deals.

The resulting pool of ICO risk

What’s done is done at this point for the majority of ICOs. Assets that were created as a result of an ICO and those involved in the issuance process can not take that ICO back. Token sales now date back five-plus years and the money involved has now dissipated through the world.

Many of the largest ICOs and crypto assets presently hold substantial risk as the following questions remain unanswered:

  1. Is the crypto asset a security now?
  2. Was the crypto asset a security during the initial or any subsequent sale?
  3. If not, did an exemption apply or was it an unregistered securities sale?
  4. Is U.S. securities law even relevant?

The SEC highlighted three key parties at risk of future action:

  1. Issuers of unregistered securities offerings.
  2. Investors in unregistered deals.
  3. Exchanges facilitating unregistered securities trading.

Regulatory action against any of these parties would likely result in selling and negative pressure on the underlying asset’s price. An action against exchanges would also likely coincide with a decrease in liquidity. Not only could exchanges be liable for previously facilitating the exchange of securities without necessary licensing, but in the event the exchange was currently listing the asset for trading and needed to delist the asset, overall market liquidity could drop severely.

Many crypto assets trade on only one or very few exchanges and thus an exchange delisting can suffocate liquidity and price. In addition to bad PR, the diminished liquidity would likely make it more difficult for new capital to buy in the future due to decreased on-ramp options. Further, other exchanges without securities trading licenses may also immediately follow suit and delist the asset to reduce regulatory risk and scrutiny, further centralizing liquidity.

What will regulatory action look like?

The DAO ICO illustrates a clear situation where:

  1. An issuer sold unregistered securities to unaccredited investors in the U.S.
  2. Both global retail and sophisticated institutional investors invested (many also leading the development of both The DAO and ethereum).
  3. Several exchanges (with users including unaccredited investors in the U.S.) facilitated the unregistered exchange of unregistered securities.

In their conclusion that DAO tokens were securities, the SEC took no enforcement action against the ICO issuer. Similarly, no investors or exchanges have been charged.

Many relative high profile ICOs are in a similar situation.

In June 2018, SEC director William Hinman stated “putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions (as with Bitcoin)”.

This statement. I believe, illustrates a few things:

  1. Hinman does not believe bitcoin and ether are currently securities due to their “decentralized structures”. (I would love to see more of his analysis.)
  2. Hinman purposefully “put aside” ether’s ICO and likely believes ether may have been a security at the time of the initial offer. (Presumably because he believes ether was more centralized at the time.) 
  3. Hinman likely believes that ether became decentralized enough to lose its securities classification at some point. Thus, he likely believes that the ether ICO was a securities offering and perhaps some exchanges were facilitating securities trading at some point in time. (I would love to see his analysis on when ether changed to decentralized.)                                                                                    
  4. SEC staff can make relatively bold statements in public. Statements from SEC staff are not the same as official reports from the SEC. Hinman speaking at a public Yahoo Finance conference is not the same as a report from the full SEC (but many could perceive it as such).

If Hinman thinks like his colleagues though, ethereum’s ICO may very likely be seen as an unregistered securities offering.

If ethereum’s ICO was an unregistered securities offering, the list of ERC20 ICOs and tokens built upon its blockchain looks something like a minefield on top of a house of cards. Not only are the majority of these ICOs likely unregistered securities offerings, but many of them have likely not cleared the bar of becoming decentralized that Hinman believes ether did.

Thus these assets not only had unregistered securities offerings in the past, but they are also currently securities. These token projects are not only at risk of enforcement against the issuer, but also most heavily at risk of a sharp drop in liquidity due to action towards exchanges without securities trading licenses and the subsequent delistings.

If my conclusions are correct, the SEC’s wrath has not yet passed. Rather, I believe the SEC is simply taking its time in organizing the facts and appropriate actions towards hundreds of ICO issuers, investors and exchanges.

The wave is building and I believe action is coming. The current list of enforcements in 2018 may be minuscule to what it will look like in a few years.

It is clear that many ICO issuers as well as the investors and exchanges that traded the tokens have taken some questionable actions. However to be fair to entrepreneurs, regulatory guidance has been extremely minimal and trying to navigate the industry generally feels like you’re wearing a blindfold.

In the long term, more regulation should lead to a higher quality marketplace for entrepreneurs and investors, and a better reputation for the eventual end user and industry as a whole.

In the short and medium term, though, we should be in for an interesting ride of regulatory action around ICOs.

Investing and avoiding regulatory risk

Investing in the crypto asset class is obviously extremely risky. Diversification within the asset class is somewhat of a myth. Liquid crypto asset price movements are highly correlated and many early stage crypto investments share exposure to (1) risk around securities regulation and (2) ethereum as its base blockchain.

Bitcoin leads the crypto asset class in terms of market cap, liquidity, age and security. I thus believe bitcoin should be most long crypto investor’s primary benchmark, and any alternative crypto investment should be analyzed as to the opportunity cost vs holding BTC. In modeling out various scenarios, one of the greatest weaknesses of many alternative crypto assets is the uncertainty around future liquidity.

If you invest in a very early stage deal, before even the ICO (in a pre-ICO, SAFT, or similar round), the journey to liquidity may entail:

  1. Waiting for the team to build initial software.
  2. Waiting for the team to decide on a public offering or token distribution strategy.
  3. Waiting for the team to distribute you tokens after any vesting or lock-up period.
  4. Waiting for an exchange or similar liquidity avenue to open a market you can sell on.

In addition to that daunting gauntlet of hurdles, at any point during this journey or after, regulatory risk can persist. The token can be deemed to have been a security when it was sold without proper registrations in the past, likely severely harming its liquidity.

When investing in any early stage deal, you need to be (1) very confident on your early stage deal’s estimated timeline to liquidity, and/or (2) confident that it can outperform BTC on any time horizon (as BTC will be liquid on all timeframes).

A VC portfolio can have many strikeouts that one home run like ETH can make up for, but I do believe many (especially institutional) crypto investors make the mistake of over-allocating to illiquid positions.

On recent time scales the ROI of ICOs vs liquid asset alternatives just doesn’t make sense unless you are extremely lucky or diligent and active with your ICO selection and trading. The lack of liquidity means that early stage investments that are going poorly are unable to be sold, leading to retaining underperforming regulatory risky and correlated positions. In my opinion, the benefits of the ability to actively re-balance a crypto asset portfolio cannot be overstated (2017–2018 alone should be proof of the advantages of liquidity alone).

Outside of early stage illiquid deals, I generally group liquid asset ICO regulation exposure in three buckets:

  1. Least risky: asset has had no sales (no ICO, etc.) – e.g., BTC, XMR, DCR
  2. More risky: asset had a private ICO or sales (restricted to institutions, accredited investors, etc. only) – e.g., FIL, ZEC, XRP
  3. Most risky: asset had a public ICO (totally open to anyone in the world) – e.g., ETH, EOS, SNT

To minimize risk to future securities regulation, minimize overall exposure to early stage illiquid deals without clear registration and liquid assets in bucket 3.

The SEC has not forgotten or overlooked any deal, the wave of ICO regulatory action is coming.

Wave image via Shutterstock

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How One Project is Fighting Fake ICO Reviews Using AI and Blockchain

On October 24, Revain, a service for collecting customer reviews, released a full-scale working 1.0 version of its Ethereum-based platform. As the project team reported to Cointelegraph, the 1.0 version is completely blockchain-based, containing a verification system and artificial intelligence (AI), among many of its other new features. “Users can see all of the reviews written in the blockchain on a special page,” reads the official press release.

The Revain platform was launched in order to change the process of collecting reviews from customers, by means of blockchain technology. The service is aimed to help new projects and startups obtain feedback from users. Specifically, the platform was designed for companies that have concluded their crowdfunding or ICO campaign.

Refining the Dashboard

The basic element of the Revain platform is its Dashboard, which allows startup teams to communicate with users and reward them for high-quality reviews. “We have been actively working on creating the Dashboard. There have been ten releases: versions 0.1 to 1.0 with a number of new features added,” the Revain team reported to Cointelegraph.

According to Revain’s previous press release, the Dashboard may be helpful for companies in various ways. Firstly, replying to specific reviews is a great tool for managing negative reviews and encouraging positive ones. Secondly, as the Revain team assures its users, a large number of quality reviews about a company will make it stand out among others in a very positive way.  

Revain is using AI to monitor the quality of reviews, with no third parties involved. The AI moderation system will be able to consider the tone of the reviews, as well as filter them based on certain parameters — such as emotion, language style, and social tendencies. “Revain AI filters out low-quality reviews and makes quality ones eligible for rewards,” reads the company’s press release.

Users are supposed to benefit from writing reviews on the Revain platform. In order to motivate authors to write reviews, companies can reward users with internal tokens called RVNs.

Revain has recently introduced its first premium service for blockchain projects and crypto exchanges which were designed to help them improve their reputation and perception among the crypto community. A premium subscription was the main part of the latest v0.9 release of the Dashboard. Besides the premium subscription, Revain completely redesigned the complimentary email and added the ability to share a specific review.

Due to blockchain technology — and Ethereum platform especially — all of the reviews cannot be deleted or changed, says the company’s website. So far, the platform covers a few kinds of reviews: ICOs, crypto exchanges, e-commerce, as well as FMCG companies and services. In addition to these, the company plans to add other sectors at a later.


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