ICOs and cryptocurrencies require different risk strategies

The recent wave of activity and press coverage, in the last 18 months in particular, regarding initial coin offerings (also referred to as sales of digital tokens) have created confusion regarding their relationship to cryptocurrencies.

Although certainly related both in the concept and in the drive, those interested in this thriving market will be wise to note that both the risk and the regulatory landscape for existing cryptocurrencies (also called virtual currencies) differ from ICOs / token. Those who go on, not informed, are going to learn an expensive lesson.

Cryptocurrencies are digital or virtual currencies, intended to be used as a form of payment similar to the currency issued by the government, which are encrypted (protected) using cryptography. Cryptography refers to the use of cryptographic techniques to protect and verify cryptocurrency transactions. Bitcoin represents the first decentralized cryptocurrency, which is powered by a public register that records and validates all transactions chronologically; this ledger is called blockchain

  Graph: where ICO money goes

Blockchain generally creates a pseudonym register in which the creation and each subsequent cryptocurrency movement are recorded and verified through a decentralized computer network throughout the world. Blockchain technology has many potential applications outside of cryptocurrencies and, compared to cryptocurrencies, blockchain is the "operating system" on which cryptocurrencies turn.

"Altcoin" refer to cryptocurrencies which are an alternative to bitcoin. Most of the altcoins are bitcoin variants, created using the original open source bitcoin blockchain platform with changes to the underlying codes, which create a new coin with a different set of features.

Examples of altcoin bitcoin variant are Namecoin, Peercoin, Litecoin, Dogecoin and Auroracoin. Altcoins that are not bitcoin variants have created their own blockchain and a protocol that supports their native currency, such as Ethereum, Ripple, Omni, Nxt, Waves and Counterparty. The bitcoin explosion has created a diverse ecosystem of other cryptocurrencies. To date there are over 1,600 cryptocurrencies with a total market capitalization of about $ 2.96 billion, according to data available on Coin Market Cap.

While the underlying purpose of bitcoin / altcoin cryptocurrencies is to serve as an alternative form of payment currency, the real attraction for investors is the speculative trading of cryptocurrencies. The value of these cryptocurrencies oscillates dramatically, driven by trading: July 17, for example, the price of bitcoin has risen above $ 7.400, adding $ 20 billion valuation in 30 minutes only from that price increase. A currency that floats so volatile can be great for cryptocurrency traders, but is not suitable for conducting payment transactions, so cryptocurrency trading platforms like Coinbase also offer exchange services to merchants who accept cryptocurrencies (like Overstock.com ) to protect cryptocurrency evaluation volatility.

The bitcoin / altcoin regulatory issues have been constantly developing around the world since the bitcoin launch in 2009 and the current state of US regulation and enforcement for bitcoin / altcoin can be summarized as follows .

From 2013-2015, the US Department of the Network for the Control of Financial Crimes of the Treasury studied the use of cryptocurrencies in illegal activities (such as the infamous "Silk Road" website). In order to prevent financial exchanges from being used to launder money or finance offenses, including terrorism, FinCEN has taken a position that the cryptocurrency exchanges and administrators are subject to bank secrecy laws (BSA) / anti-money laundering laws and must register as federal monetary services. However, preventing cryptocurrencies from being used for such activities continues to present a constant challenge in the field of legislation and law enforcement.

The legislation on money transmitters in the United States is separated from the registration of the federal monetary services companies and is statistically governed. Currently, the processing by states of cryptocurrencies for money transmission licenses varies dramatically according to the single law of each state and the interpretation of the regulator. For example, as of August 8, 2015, the New York State Department of Financial Services established a regulatory framework that any virtual currency company would have to comply with and obtain under license (New York "Bitlicense" section 23 NYCRR). In contrast, the Texas Banking Department issued a supervisory note on April 3, 2014, stating that "because the cryptocurrency is not money under the Money Services Act, receiving it in exchange for a promise that will make it available in a second time or in another location is not the transmission of money. "

To address this disparate treatment, the Uniform Law Commission has finalized a model" Law Regulations on Virtual Currencies "in 2017, and a version of this uniform law was introduced (but not yet approved) in three states until now in 2018 (Connecticut, Hawaii and Nebraska).

In 2014, the Internal Revenue Service (IRS) described cryptocurrencies as "a digital representation of value that functions as a medium of exchange, a unit of account, and / or a store of value [and] has no legal status in any jurisdiction. "IRS treats cryptocurrencies as properties and requires gains or losses to be calculated on an exchange of criptocur

The Office for Financial Consumer Protection has published a notice on consumers in August 2014 to warn consumers about the risk of cryptocurrencies. The consultant warned consumers of hackers, scammers, loss of cryptocurrency funds and value if the consumer loses the private key, less regulations, lack of FDIC insurance coverage and inability to make chargebacks and disputes transactions purchased with cryptocurrency. However, in a recent change in attitude towards emerging financial technologies, including cryptocurrencies, the CFPB announced on July 18, 2018 that it is launching a new Office of Innovation that will provide guidance and a "regulatory sandbox" environment to create policies that could facilitate innovation, engage with entrepreneurs and regulators and review obsolete or unnecessary regulations.

The Federal Trade Commission has introduced several enforcement actions concerning cryptocurrency within the scope of Section 5 of the Law on Unfair and Unlawful Practices and Illicit Practices, including that for the misleading sale of goods related to cryptocurrency mining ( FTC v. BF (Butterfly) Labs, Inc., et al., No. 4: 14-cv-815 (WD Mo. Sept. 2014)).

The Commodity Futures Trading Commission has claimed the enforcement authority on cryptocurrency due to the IRS classification as "commodity" and has brought several protective actions under its supervisor negotiating commodities, for example for fraud and misappropriation in connection with purchases and trading of virtual currencies bitcoin and Litecoin (CFTC v. Patrick K. McDonnell et al., 1: 18-cv-00361 (EDNY, March 2018).

The Securities and Exchange Commission treats cryptocurrency crimes as violations involving any other currency, and has been the most active control agency on both bitcoin / altcoin cryptocurrency investments and for ICOs (discussed below).

On bitcoin / altcoin cryptocurrencies, he took enforcement actions to defraud the bitcoin / cryptocurrency altcoin investors, for example by conducting a Ponz scheme i offering shares in a Bitcoin mining operation that did not have enough computational power for mining that they had promised to lead (SEC vs. Homero Joshua Garza, GAW Miners, LLC, et al., Civil Action no. 3: 15-cv-01760 (D. Conn., Complaint filed on December 1, 2015). A "miner" of the cryptocurrency essentially allows the computer or network node (a larger group of computers) to be used to download and solve complicated mathematical problems called "job tests" in order to create a new cryptocurrency block every Once a series of transactions is accumulated in a block, this is added to the blockchain, and the successful miner is rewarded with a portion of the blockchain's cryptocurrency.

The continuous evolution of cryptocurrency has brought us crypto-token, created through an initial supply of coins intended to operate in a similar way to an initial public offering for stocks. A startup entity launches an ICO by issuing crypto-token on the blockchain (usually the Ethcoum bitcoin or blockchain), giving early investors the ability to acquire tokens in exchange for a new cryptocurrency yet to be issued. A first coin offering is typically used as a fundraising instrument that exchanges future cryptocurrencies in exchange for immediate liquid value cryptocurrencies (eg, bitcoin / altcoin cryptocurrencies). In fact, the derivative nature of these crypto-tokens creates an exponential element, intensifying the risk and (an investor would hope) the potential return.

ICOs are usually limited by time or a ceiling on the amount of funds raised. The value and number of tokens released may be static or vary based on the total investment guaranteed. And the tokens that ICO investors receive are essentially digital coupons for a corresponding amount of the new Charles Mackay coins. Investors hope that successful projects will increase the value of tokens. This increase in potential value provides the basis for the current perception of the ICO's appeal.

As in every boom, bad actors hide in the ICO space. Given the history of tolerant bitcoin / altcoin cryptocurrency actors, it is not surprising that ICOs are attracting scammers who try to fool prospective investors. But investors are becoming more sophisticated on the assessment of potential ICOs, generally preferring ICOs that focus on selling digital tokens linked to a clear case of use in a blockchain application (referred to as a "utility" ). The utility of tokens in an application with a solid concept and strong potential means that there would be a request for tokens if the application succeeds. If a start-up entity is issuing tokens that are not related to the activity or underlying technology in any way, then the tokens are substantially meaningless.

If tokens in some way give rights to some returns, dividends or profits, then there are legal and regulatory issues to consider. The first thing for an entity that tries to offer an ICO to consider is whether the ICO or the token could be characterized as a security or some other scheme that will require regulatory approvals. This will affect whether or not to proceed, where to incorporate or register the legal entity that issues tokens and conduct ICOs and potentially those who prohibit being involved in ICO. Secondly, regardless of the legal characterization of the ICO or the token, the ICO entity must also tackle the problems of anti-money laundering and counter-terrorism financing by ensuring a certain level of due diligence and know-your-customer measures.

application problems are, if possible, less consolidated than the bitcoin / altcoin regulatory issues discussed above, and the current status of US regulations and measures on bitcoin / altcoin can be summarized as follows.

The Securities and Exchange Commission is currently the most active US regulator in the ICO space and considers ICOs as investments. The SEC has already clarified that it intends to repress ICOs that do not comply with legal requirements or otherwise threaten investors' bias.

The SEC devotes a web page to teach investors about ICOs (https://www.sec.gov/ICO) and has published numerous investor bulletins, employee warnings and talks about virtual currencies. In addition, the SEC introduced 11 ICO related enforcement actions in the last calendar year, including a complaint action for an unregistered stock exchange operation, exchange user fraud and statements false and misleading in relation to an unregistered supply of securities (SEC against Jon E. Montroll and Bitfunder).

Government bond regulators are also taking action against ICOs. On January 4th of this year, the North American Securities Administrators Association issued a statement entitled: "NASAA reminds investors to approach cryptocurrencies, initial bidding and other cryptocurrency investment products with caution . "

Joseph Borg, President and Director of NASAA's Alabama Securities Commission, in the statement states that investors should go beyond "headlines and advertising bids" to learn about the risks associated with these investments. The Texas State Securities Board issued an emergency stop order against BitConnect based in the UK, disrupting the company's initial January 9 money offer.

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