SEC says international support critical to bring sham ICOs to justice

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The SEC is determined to eradicate the rampant fraud that persists within the Initial Coin Offering (ICO) space. Steven Peikin, co-director of the Securities and Exchange Commission’s enforcement division, recently delivered a speech to the Harvard Law School’s Program on International Financial Systems in which he made known his agency’s desire to clean up the ICO ecosphere.

The key issue, according to Peikin, is that a majority of ICOs have effectively moved offshore, thereby making enforcement difficult:

The sponsors of ICOs are, in many instances, located outside the United States. And international cooperation is critical to our ability to investigate and, where appropriate, recommend that the Commission bring enforcement action.

The use of ICOs as a funding vehicle for blockchain related projects has been nothing short of phenomenal. As Peikin cited, funds raised in 2016 were a mere $100 million. Fast forward to 2018, and the figure has skyrocketed to $22 billion. If you do the math, the growth in two short years comes to 22,000%. The ICO phenomenon is reminiscent of the early days on the Internet revolution. Investors threw tons of money at any project that claimed to be associated with the web. Now, as then, the hype has attracted a great deal of fraud. ICOs are unregulated, without the basic registration, disclosure, or transparency requirements that other investment media must comply with by law.

Peiken goes on to explain that:

The growth in the ICO market can obscure the fact that these offerings are often high-risk investments. The issuers may lack established track records. They may not have viable products, business models, or the capacity for safeguarding digital currencies from theft by hackers. And some of the offerings can be simply outright frauds.

A few fraud research studies have been performed, using 2017 ICO data, and the results made alarm bells ring in every regulatory agency across the globe. Very few efforts have produced a viable product or service with revenues. Many operations have shut their doors within one year of their funding, leading researchers to estimate that as many as 85% of all ICO ventures to date are frauds. The opposing argument is that the high casualty rate may include fraudulent operations, but the other failures could more than likely be attributed to poor business plans and incompetent management teams.

After learning of the severity of the problem, the SEC began working with Canadian authorities to develop an attack plan, code named “Operation Crypto Sweep”. Back in May, the combined group launched its crackdown, resulting in over 70 investigations into cryptocurrency scams and fraudulent initial coin offerings. Celebrities have also been rounded up as accomplices, if the facts and circumstances surrounding their endorsements were deemed illegal. The SEC recently fined boxing champ Floyd Mayweather and music producer DJ Khaled $767,500 for illegally promoting ICOs.

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