As Bitcoin, other currencies soar, regulators urge greater caution
The public’s interest in all things bitcoin and efforts by entrepreneurs to fund their businesses with digital currencies is starting to draw more attention from regulators.
The head of the US Securities and Exchange Commission (SEC) this week warned investors on the risks of investing in largely-unregulated digital currencies. And another federal agency is now proposing to regulate bitcoin trading like other regulated commodities such as wheat, oil, gold and silver.
Just this month, the SEC halted two attempts to raise money through what’s known as an initial coin offering. Legal experts believe this signals that a crackdown on sketchy offerings is coming.
“The SEC has given so many warnings now that people should know they are on notice,” said Joshua Klayman, a lawyer with the firm Morrison & Foerster who specializes in legal issues related to digital currencies.
The world of bitcoin and digital currencies can be split into large branches. There are investors who buy the currencies like bitcoin and ethereum. Related but separate from the currencies is an event known as an initial coin offering, or ICO, which allow startups to use the technology behind bitcoin, known as blockchain, to fund projects.
With an ICO, a startup will issue a currency, or sometimes called a token, that can be used to buy services with the company. For example, a startup offering online storage could have tokens that can be used to buy storage.
ICOs have soared in interest this year. CoinSchedule, which tracks the ICO market, says 234 ICOs this year have raised $3.7 billion for startups. In 2016, 46 ICOs raised less than $100 million.
How these tokens are marketed has become a central question for the SEC. Companies issuing tokens that are usable on their own platform right now aren’t a concern, but when the company’s marketing implies that these tokens can appreciate in value, that becomes a red flag.
“We have gotten to a point a few times where some of these tokens start looking an awful lot like securities,” said Clyde Tinnen, a Withers Bergman partner.
What to watch out for
Investors in ICOs are oftentimes early investors in bitcoin or other digital currencies who, with the rapid rise in price, have become multimillionaires on paper and are now looking for the next hot idea. But some of the ICOs that have been funded are just that — an idea on paper. They might even use language copied and pasted from other ICOs to sell their startup to investors. Others have paid celebrities, like boxing legend Floyd Mayweather and socialite Paris Hilton, to endorse their ICOs. All this has raised concerns about the potential success of these projects and whether some are just outright scams.
“I am not sure why it took so long to chase down some of these,” Tinnen said.
The SEC recently created a division to more closely monitor ICOs for potential scams.
Following the launch of bitcoin futures on the Cboe Futures Exchange this week, SEC Commissioner Jay Clayton issued a statement warning investors to be cautious about putting any money into digital currencies like bitcoin.
One reason regulators are concerned is the relative popularity of bitcoin and ICOs with non-traditional investors. Historically, the last group to jump into an asset in a bubble is retail investors, who are often the most hurt when the bubble pops. But in the case of bitcoin and other digital currencies, retail investors were among the first to invest.
The price of bitcoin has soared this year, going from less than $1,000 to $18,000. Bitcoin’s gains have rippled through other digital currencies as well. The price for ethereum is now at $706 — it was a little over $8 at the beginning of the year. That’s a rise of nearly 8,300 percent.