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| 01 March, 2018

Coin-offering boom carries seeds of its own demise

Investors are taking a real leap of faith to put money into so many ventures

Image used for illustrative purpose. A pile of AED one dirham coins is seen in Dubai.

Image used for illustrative purpose. A pile of AED one dirham coins is seen in Dubai.

REUTERS/Jumanah El-Heloueh

NEW YORK - Jay Clayton is putting his digital money where his mouth is. After repeated warnings in recent months about the risks of initial coin offerings, the Securities and Exchange Commission chief is cracking down. The agency has issued dozes of subpoenas and requests for information to companies and advisers involved in ICOs, the Wall Street Journal reports. Tighter scrutiny is welcome given the billions of dollars being raised.

Barely two months after Clayton took office last May, the agency ruled that a coin offering could be regulated as a security. In December, it provided fuller guidance, cautioning that many ICOs were marketed on the potential for tokens to increase in value and be sold on a secondary market – “key hallmarks of a security and a securities offering,” it said. And in January Clayton told a gathering of securities lawyers that he found lawyers’ involvement in helping ICOs skirt SEC regulation “disturbing.”

Shares in Overstock.com fell 5 percent on Thursday after the online retailer said the SEC had requested information about its planned $250 million ICO. But the warnings have so far done nothing to chill activity. More than 90 ventures have tapped the market so far this year, raising funds at an annual rate of $18 billion, or more than three times the amount raised in 2017, according to crypto-currency information provider CoinDesk. In addition Telegram, an encrypted-messaging startup, disclosed in February it had raised $850 million in a private sale of tokens to develop a blockchain-based payments service. It’s expected to pull in even more money when it launches its formal coin offering.

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The disruption potential of blockchain and the surge of bitcoin - up more than tenfold since the end of 2016 despite a nearly 50 percent plunge since December - are feeding the frenzy. But there are more than 1,500 crypto-currencies listed on CoinMarketCap, and hundreds more in the pipeline. There’s the oil-backed PetroDollar, not to be confused with Venezuela’s government-issued petro. And there are multiple coins vying to become the crypto-currency of pornography, including FAPcoin, which is not to be confused with FlappyCoin, based on the mobile-phone game Flappy Bird.

Investors are taking a real leap of faith to put money into so many ventures with sketchy business plans. It’s not the SEC’s job to stop them from making bad decisions, but the ICO market’s lack of decent disclosure makes it ripe for disruption.

CONTEXT NEWS

- The Securities and Exchange Commission has issued dozens of subpoenas and information requests to technology companies and advisers involved in the market for initial coin offerings, the Wall Street Journal reported on Feb. 28, citing people familiar with the matter. The requests include demands for information about the structure of sales and presales of ICOs, it said.

- In December, the SEC said coin offerings that have characteristics of a securities offering, such as holding out the potential for the enterprise to generate a profit, must abide by U.S. securities laws, including the need to register the offering with the agency.

- In a typical ICO, entrepreneurs publish a white paper outlining the business they aim to develop, typically based on blockchain technology, and issue digital currency tokens in exchange for cash or crypto-currencies like bitcoin. Scores of ventures raised just over $3 billion via ICOs in the first two months of this year, according to Coindesk.com, compared with $5.4 billion in all of 2017.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by John Foley and Ben Kellerman)

© Reuters News 2018