At the start of this month Brave Software broke all digital funding records by raising US$35m in 30 seconds when they launched an Initial Coin Offering (ICO).
However eye-watering those numbers might be, the response from the United States Securities and Exchanges Commission has been to accelerate their pursuit of introducing regulations for ICOs. This bold regulatory step has caused industry insiders to question whether the Commission’s underlying motive might really be to scrutinize whether raising funding in exchange for self-branded cryptocurrency is actually legal.
As solicitors who specialise in digital fraud we are increasingly involved in helping clients settle disputes that have arisen on the back of fraudulent ICOs, we would have to say an open discussion on the legality of ICOs is probably long overdue. And, with even more new ICOs slated over the coming weeks, the likelihood that a significant percentage of these projects may be fraudulent and designed to play straight into the hands of greedy would-be investors seems highly probable.
So how could an openly promoted and openly available funding mechanism that has raised almost US$0.5bn in less than 2 years be considered illegal?
If we look at the ICO process - a company offers investors its own cryptocurrency tokens in return for an investment – there is nothing illegal about that. However should the purpose of the funding be to support the development of the tokens with the assurance that the tokens would be provided at a later date, there could very well be an argument that this is a presale which could be construed as selling securities. Under US regulations this would mean the offering would have to either be registered with the Securities and Exchanges Commission or satisfy one of the exemptions outlined in their regulations.
This is how the Securities and Exchanges Commission intends to crack down on the potential of fraudulent ICOs. By enforcing adherence to their regulations would prevent companies from issuing crypto-tokens on a promise and a promise they have no intention of fulfilling.
Many within the growing cryptocurrency world see such regulatory interference as unnecessary and unwanted. They prefer to trust the ‘smart contract’, coding designed to take the human element out of the contracting process and instead construct deals using pre-programmed rules. The possibility of producing smart contracts in their truest form is something that we, as solicitors, have openly questioned in the past but there can be no question about just how enthusiastically many still view the principle even if the delivery still needs work.
However those involved wish to contract is not the issue at hand; the increasing instances of reported ICO fraud is.
The debate as to whether or not offerings based on pre-selling of tokens should be classed as a securities sale may be an immediate workaround but at some point regulatory legislation will have to be created to protect those involved with any investment, deal or exchange involving bitcoin and cryptocurrency. If that legislation is going to satisfy what is now a truly international community, it will need to be formed on the back of cooperation between the countries housing the world’s major financial centres.
As the buzz around ICOs continues to increase we would assume ICO fraud will only increase alongside it. If you are a victim of ICO fraud or any other form of bitcoin or cryptocurrency scam email us today at This email address is being protected from spambots. You need JavaScript enabled to view it. or call us on 020 7792 5649. Our team of specialist lawyers are hugely experienced when it comes to settling any dispute involving any type of digital fraud.
