In this edition, we cover the recent attempts by the federal government to intervene in flatly-illegal and semi-legal blockchain-based startup projects. Following the ever-widening money trail into the cryptocurrency space, the government has plans to tax and regulate Initial Coin Offerings (ICOs). How successful they will be remains to be seen, as the decentralized and legally-unestablished nature of these projects will keep the boundary pushers ducking regulation, and the government will perhaps find itself playing an unwinnable game of whack-a-mole.

2017 06 19

BTC Rise Interrupted, But For How Long?

Though the price of bitcoin has rebounded a bit since falling from all-time highs near $3,000 earlier this month, its seemingly endless climb has begun to slow. A relatively massive price correction took place on June 15th, wiping out around $16 billion in total digital currency market capitalization, though a lot of it has since come back in the last 3 days. Price corrections are bound to occur in any market when those who bought in low start to sell high to secure their profits, sometimes triggering a wave of other sellers who attempt to retain trading profits which creates an avalanche-like effect on price. As of June 18th, the avalanche had halted, with the price of BTC resting at about $2,500.

SEC Stepping Up Role In Crypto Regulation

Profit taking might not be the only factor dampening bitcoin’s massive run in 2017. The Securities and Exchange Commission (SEC) has recently taken a more proactive role in trying to regulate how people sell and invest in cryptocurrency, largely in response to the ever-growing amount of dollars lost in fraudulent investments and Ponzi schemes. Just last week, the founder of a bitcoin mining investment group was convicted of defrauding investors of $19 million in bitcoin. This landmark conviction against GAW Miners and ZenMiner by the SEC signals the firm intent of the government to combat cryptocurrency-related fraud.

house of cards

Instead of using investor funds to purchase and operate mining equipment – as promised in the investor contracts – group founder Josh Garza used only a small portion of the funds to buy mining equipment and used rest to furnish a lavish lifestyle. He then used funds from new investors to pay phony “profits” to old investors until the new investor money stopped coming in. At this point Garza could no longer pay old or new investors and his businesses collapsed. He ultimately plead guilty to allegations of defrauding up to 10,000 investors of their bitcoin, and will likely serve a hefty prison sentence, in addition to having to repay $12 million of the stolen funds.

Ponzi Scheme

Crypto Stocks Also Feeling The Heat

Bitcoin and cryptocurrency in general also face the harsh reality of the negative stigmas still attached to them. This is perhaps another reason as to why the SEC is clamping down on bitcoin investments, recently suspending a Florida-based cryptocurrency venture capital firm from trading its securities on the open market until additional information about the company could be obtained. The firm, known as Sunshine Capital, raised money to buy other assets by selling its own cryptocurrency to investors. Sunshine Capital is listed on the “Pink Sheets,” meaning it is a publicly-tradeable stock, and as such it is subject to more federal oversight than bitcoin or any other cryptocurrency.

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The Beginning Of ICO Regulation – The End Of The Wild West?

The SEC may also soon involve itself in regulation of the untamed ICO market, where there is still room for plenty of fraud to take place, at a rather anonymous level and in a legally-gray area. Money laundering, drug dealing and the facilitation of other crimes are among the chief reasons why the SEC has chosen to involve itself into overseeing the ever-exploding world of blockchain-based investments. In March 2017, the SEC stepped in and halted the ICO for an advertising startup called Traffic Monsoon, claiming that what the startup was selling was the equivalent of securities as defined by federal law.

Traffic Monsoon claimed that because the majority of their investors were internationally-based and not located in the U.S., they were not subject to U.S. security laws. Because the company itself was based in Utah, a federal judge sided with the SEC over the issue, simultaneously confirming that U.S. federal security laws did apply to the company and also that the definition of a security could be applied to IPO-related products.


Bancor Breaks All Crowdfunding Records

The SEC’s ramped up efforts and vows to regulate the ICO market isn’t slowing down the seemingly endless streams of big investors money flowing into new blockchain-related projects, however. Earlier this week, the billionaire investor-backed Bancor broke all crowdfunding records by raising over $150 million in ETH, making it the most successful ICO launch to date. Bancor hopes to aid in “token price discovery” through complex formulas involving the smart contracts of different tokens. In this way, they are advertising themselves as the first “smart token,” or a token capable of carrying out a set of instructions on its own.

The goal of Bancor is to increase the liquidity of all cryptocurrencies, big or small, by making them instantly attainable with Bancor tokens. Though it is hard to know where the SEC will stand on Bancor or what actions they may take, the company is already partnering with cryptocurrency debit card provider Token, completing the fluidity of value from cryptocurrency to fiat currency. Expect the legal waters surrounding blockchain-based investments to get even muddier in the future, as the government tries to find ways to appropriately tax and regulate them, however successful they may be.