Where there’s money -- there are people trying to get at it. The cryptocurrency space has seen an incredible influx of money over the last several years. People have been coming up with new and creative ways to get at it -- legally and illegally. The SEC has been trying to curb the illegal part. But on their warpath, they might throw the baby out with the bathwater. Is there a chance they could target our favorite coins? Perhaps.
The SEC & cryptocurrencies -- a warlike relationship
The Securities and Exchange Commission, like other American exigencies, thinks of itself as a type of ‘world police.’ This extends to cryptocurrencies. Typically, the SEC is restricted to enforcing laws and punishing violators in the United States and its territories. Despite this, the SEC was able to reach beyond its borders and shutdown 1Broker’s crypto exchange platform, despite its legal founding and location being within the Republic of the Marshall Islands. To drive home the point, the Marshall Islands have enjoyed sovereign Republic status since 1986— they are not a US territory. This is warlike behavior against crypto. So, who do they target?
Targets of the SEC
It’s open season out there. The SEC is targeting exchanges, ICOs, even advisors of large cryptocurrency portfolio companies. We don’t want to be caught in the crosshairs. Let’s take a look at how to avoid the SEC’s wrath.
If a cryptocurrency exchange is targeted by the SEC -- your favorite coins might go down with it. As the old saying in crypto goes: if you don’t hold your private keys -- you don’t hold your crypto. Even if your favorite coin is the king, Bitcoin itself, you might lose it or at least have it locked away for an unknown period of time. Take a look at this example of the 1broker exchange:
“The undercover FBI agent who investigated 1broker bought his first unregistered security-based swap on March 30, 2016. The government didn’t take action until two and a half years later. The majority of ICOs (unregistered securities?) were issued in 2H 2017. Buckle up, folks.”
In this case, the SEC worked with the FBI to issue a seizure warrant against the 1Broker platform. The warrant showed violations of ‘money laundering’ and ‘willfully operating as an unregistered broker/dealer of securities’ -- do you know what that meant for people who had their favorite coins stored there?
People who had their coins stored on 1Broker were locked out. Because the FBI slapped 1Broker with ‘money laundering’ -- all funds stored on the exchange were frozen. For how long? Until the FBI completed its investigation. How long would that take? Years.
Learn from these mistakes. The SEC can shut down your favorite coins if they shut down the exchange you’re storing them on.
ICO’s in and outside the U.S. could be targeted
Does your favorite coin come from an ICO? Most likely. After all, Ethereum was started as an ICO. So was EOS. A few others spring to mind. Perhaps you’ve found a promising new ICO or STO that you believe holds massive potential. That’s great, but will the SEC shut it down? For clues, we turn to two ICO’s that the SEC kicked to the curb: Airfox and Paragon.
“Cease-and-desist orders were entered under the Securities Act of 1933 against two companies that raised money in token sales in late 2017. The SEC says:
(1) each company’s token was a security
(2) each broke U.S. securities laws because they:
(a) failed to register with the SEC
(b) did not qualify for an exemption”
Airfox raised $15 million in its ICO. Paragon raised $12 million. These are not light sums. Perhaps $15 million seems small compared to ICOs that raise hundreds of millions -- but for the people who invested $1,000’s of ETH into these ICOs --- such an SEC shutdown hit home and hit hard. Both Airfox and Paragon said they would refund ICO participants -- but the timeline for doing so is vague.
Learn from these mistakes. If you’re in the U.S. or a U.S. Citizen -- hell even if you’re outside the U.S. -- make sure to check if the ICO is selling to U.S. citizens. If it is, then make sure they registered with the SEC or filed for an exemption. Neither Airfox nor Paragon did this. Big mistake. And investing in unregulated/illegal coins is just one of the many mistakes cryptocurrency investors make according to Cryptomaniaks.
Your favorite post-ICO coins might be under fire
The SEC is also going after coins that are well past their ICO phase. Perhaps you’ve found a darling coin and invested in it. It’s past its ICO phase, it’s listed on Binance, Bitfinex, or other large exchanges, and you think it’s safe. Unfortunately, the SEC targets all types of cryptocurrencies -- pre and post-ICO.
Take, for example, Intangible Labs. They made headlines with their new stablecoin called Basis Coin -- which was a coin that would be stable and not pegged to any centralized fiat money. The CEO, Al Naji, even had an interview with Forbes and made it to their 2019 Forbes list of 30 Under 30.
The SEC eventually classified the Basis Coin as a security, which wasn’t registered, and shut it down. Investor funds were returned, which is great, but all those people still lost their time, efforts, and perhaps even money too -- since they could have used their funds to invest in a proper project and make gains rather than having it locked up in Basis Coin.
Learn from these mistakes. Get familiar with basic SEC classifications and check to see if any of your favorite coins could be classified as a Security.
Watch out for False Claims.
Even worse than companies making mistakes -- some companies do it on purpose. Take the example of Blockvest. The SEC shut them down because...
“Blockvest falsely claimed its ICO and its affiliates received regulatory approval from various agencies, including the SEC. They were using the SEC seal without permission, a violation of federal law, and falsely claiming their crypto fund was "licensed and regulated.”
What to do in such a situation? How do you keep your eyes open?
How to avoid mistakes and watch for the SEC
Bottom line: Big, established coins -- those in the top 50 on Coinmarketcap -- will not be targeted. They’ve taken time to follow guidelines. But other small coins, exchanges, ICO’s --- perhaps. These companies made mistakes. Think about the following:
- Is the exchange, coin, ICO offering to U.S. investors? If so -- are they registered with the SEC?
- The SEC is developing a template for ICO enforcement. Does the company stick to it?
- If the coin extols its utility, its functionality, is it true? Does the coin function as a utility?
- Tokens that fit within the Howey rubric are treated as securities
- Is there any fraud? This may be tough to detect but generally works if you ask: “is this too good to be true?”
Stay alert, stay skeptical
In the end, the best defense is skepticism. Be cautious. As the old Bitcoin saying goes: “don’t trust -- verify.” If an exchange is selling or dealing with U.S. investors then make sure it’s registered. Same goes for an ICO. If your current favorite coin is available in the U.S. -- make sure it can’t be labeled as a security. Be skeptical. It’ll save from many headaches.