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SEC: More ICO Regulation Coming, Issuing Investment Guidelines

About a week ago, the cryptocurrency world received a bit of a nasty surprise. The SEC had officially confirmed it was looking into regulation of cryptocurrency ICOs. A new statement from the U.S. agency has clarified just what it aims to achieve in the long run. The SEC is mainly concerned with the risks these ICOs pose, including fake pitches and hard sells. It is a stark warning, though it does not bring us any closer to ICO regulation just yet.

SEC Continues to Eye Cryptocurrency ICOs and Their Risks

Everyone who has ever looked at a sales pitch for a cryptocurrency ICO will acknowledge there are some real risks associated. In most cases, users send Ethereum funds to a smart contract address and receive a certain amount of ICO tokens in return. Once the company raises enough money, the ICO is over and the future development of the project theoretically begins. However, there is no enforceable commitment for those companies to complete their projects, as the investors’ money resides in the smart contract the company created. If it fails to deliver on its promise, there is no real penalty for doing so.

So far, it seems there are few such “scams” to speak of just yet. However, the SEC warns the public about the potential dangers inherent in ICOs in its latest statement. The organization appears to have a few key concerns regarding the trend. Since virtually none of these cryptocurrency ICOs are registered with the SEC, none of them are officially recognized by the U.S. That means investors in failed projects will not have their funds recovered. Non-registered projects are not covered by federal securities laws, which means the money is pretty much gone. This is not an ideal situation for any investor.

It seems the aspect of cryptocurrency ICOs that concerns the SEC the most is how they are organized. In most cases, investments on such a scale are only accessible by accredited investors. In the world of ICOs, however, the requirement of investors to be registered rarely exists. Any project which deems itself exempt from such registration should be treated with the utmost caution, according to the SEC. After all, investors have no idea what their money will be used for exactly. A development roadmap or white paper would explain a lot, but there is no official guarantee or promise whatsoever.

Furthermore, the SEC wants investors to legitimately ask themselves the question of how they would get their money back if needed. Most cryptocurrency ICOs have a refund mechanism in place for unsatisfied investors. In a lot of cases, it would take a lot of time and effort to get one’s original investment back. This is a big problem that does not exist in the regulated world, as investors can always get their money back in one way or another. Thankfully, investors can often resell their tokens on exchanges in an attempt to recover their money if needed.

There are plenty of other things to be wary of when looking at cryptocurrency ICOs. Investors need to ponder whether or not the project’s blockchain is open and public, if the code has been published, and whether or not an independent audit has occurred. That last one is often a requirement to get ICO tokens listed on the big cryptocurrency exchanges. Not all projects go through those motions and will not see their tokens listed as a result. It is a major pitfall for investors when that happens.

In a way, it is good to see the SEC focus on cryptocurrency ICOs. These projects attract a lot of money and investors from all over the world including in the U.S. However, imposing regulation will likely make ICOs far less appealing to U.S. investors. It will be interesting to see how this situation plays out over the coming months and years. Right now, most ICOs dissuade U.S. citizens from investing, for obvious reasons. That situation may not necessarily change anytime soon.