In 2017, the SEC, the securities regulatory watchdog in the U.S. market, sent a shockwave through the burgeoning Initial Coin Offerings (ICOs) market, when it came down hard on a few existing ICO promoters for violations of U.S. security regulations. The ICO market did lose momentum for a bit, while also moving to other more favorable legal jurisdictions. It has recovered, and now industry executives have been pressing Congressional leaders and regulatory officials to clarify legislation to prevent further damage and stem the tide of innovation relocating away from U.S. shores.
Lobbying efforts appear to have achieved a modicum of success, based on the following report: “Late last week, the SEC launched a division that will make it easy easier for firms to surmount the legal complications of launching Initial Coin Offerings (ICOs) — a controversial crowdfunding method for blockchain-based tech companies. The new Strategic Hub for Innovation and Financial Technology, or FinHub, will serve as a contact point for the SEC to interact directly with developers and entrepreneurs in the cryptocurrency world. Prospective entrants will now be able to ask questions and get further clarity from the SEC before stepping out with a coin offering.”
Responses to this action have been very favorable. Evan Strassberg, a commercial litigator and Partner at law firm Michael Best & Friedrich LLP, said that “To the extent, the SEC is willing to help prospective digital coin offerers and investors to understand their legal obligations and rights, we view this as a very positive development. Providing greater transparency and legal certainty should aid in the growth of ICOs and the success of this sector.”
Securities litigator Michael Anderson of law firm Parr Brown also noted that “Cryptocurrencies and ICOs present many interesting legal issues right now. For all of the exciting possibilities and efficiencies they offer, they are also typically less regulated, which can increase the risk of fraud and manipulation. An increased SEC presence in this area should be positive for both current and potential investors alike.”
Parr Brown LLP President Jonathan Hafen sees these moves by the SEC as very positive: “Having litigated securities issues for many years, I can’t emphasize enough what is perhaps the most important factor for entrepreneurs, investors, and regulators: predictability. By adding resources in this area, which is in the midst of explosive growth while remaining notoriously unpredictable, the SEC is providing increased predictability from an enforcement standpoint. That is just what we need right now.”
At the very least, there is now a conduit for questions and answers to prevent potential overreactions by the SEC in future. Lobbying efforts have also focused on improving current statutes on the books to deal effectively with the digital marketplace. These efforts tend to take more time to bare fruit, but the new FinHub is a step in the right direction. The fact that legislation is always behind the curve when confronting new innovations, especially ones that move as quickly as cryptocurrencies, is nothing new. Unfortunately, the same is true for every other jurisdiction across the globe, as well.