The market for digital currencies has taken off faster than regulatory agencies could keep pace. With favored currencies like Bitcoin trading at a record high of $4,700 as of Aug. 29 and a robust international market emerging, these agencies are making moves to regulate initial coin offerings (ICOs), the way by which cryptocurrency ventures raise funds.
One method gaining steam is to regulate some ICOs under existing securities laws. On July 25, the Securities and Exchange Commission issued guidance stating that federal securities laws apply to ICOs, while Singapore quickly followed suit, deciding it will regulate ICOs as securities. On Aug. 24, Canada made its move, with the Canadian Securities Exchange Administrators (CSA) announcing that securities laws may apply to ICOs.
Canada’s move is “entirely consistent with what’s happening here in the States,” said Stephen Obie, partner at Jones Day. Obie represents Overstock.com’s financial technology subsidiary t0.com in its use of blockchain technology. “Canadian regulators are reaffirming that ICOs can be securities and that folks need to be cautious and evaluate what sort of ICO they’re launching.”
ICOs have until this August been unregulated and, when traded, did not confer ownership rights. Digital currency sales have also been frequently cited as subject to fraud. On Aug. 28, the SEC issued an investor alert warning investors of “pump-and-dump” schemes (artificially inflating a share price by encouraging investors to purchase to sell one’s own shares at a high price) and market manipulations.
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The alert followed the SEC’s trading suspension of shares from four cryptocurrency companies. One of those companies, First Bitcoin Capital Corp., is headquartered in Vancouver, British Columbia. The CSA issued its guidance on cryptocurrency offerings a day after the SEC issued its suspension of the company as well as its investor alert.
Joshua Klayman, of counsel in the financial transactions group at Morrison Foerster, wrote in a LinkedIn post that “it is interesting to consider” whether the SEC Investor Alert was partially motivated by a First Bitcoin Capital letter to shareholders suggesting that the SEC action was a “misunderstanding,” and potentially motivated by a need to curb demand for shares. She wrote:
“Could it be that the SEC’s Investor Alert was released, in part, to combat communications, like the BITCF Letter, that seeks to minimize the gravity of a temporary trading suspension? Perhaps.”
Regarding the CSA’s announcement, Klayman told Legaltech News, a partner site to ThinkAdvisor, that she “had no idea” whether the timing was a coincidence. However, she said, given that three countries have already regulated cryptocurrencies as securities, more countries are going to potentially come out with similar guidance.
“I think that will have an effect, because it will cause people to take greater caution when they are developing these types of structures for their token sales,” she explained. “It certainly should give lawyers pause when they’re advising on these to say, ‘Listen, you really need to take a hard look at this and think about whether you just want to assume it’s a security.’”