Why the SEC Should Give Amnesty to Illegal ICOs

Why the SEC Should Give Amnesty to Illegal ICOs

With an estimated $4 billion or more raised in investment capital, 2017 was a boom year for initial coin offerings (ICOs). But it was accompanied by another kind of boom: the sound of a crashing regulatory framework.

By one count, more than 50 companies per month were using token sales to raise funds – and mostly all of them proceeded without regard to U.S. securities laws.

Then, in July 2017, the U.S. Securities and Exchange Commission issued The DAO Report, which, by employing the U.S. Supreme Court’s long-established Howey test, concluded that certain digital tokens sold to investors were “investment contracts” under the Securities Act of 1933 and therefore subject to SEC registration.

Slightly more than four months later, the SEC reiterated and enforced that determination in the Munchee case, a proceeding in which the agency administratively halted an ICO as an impermissible sale of unregistered securities.

These developments were followed in early 2018 by a cascade of SEC subpoenas and enforcement actions targeting similar token offerings – many of which smacked of fraud.

Putting aside the waning debate as to what may constitute a “utility” token that does not satisfy the Howey test (and thus is not an investment contract), it is now clear what the SEC thinks: the vast majority of ICOs conducted so far in the United States have violated federal law, and the ongoing trade in those tokens involves the illegal purchase and sale of unregistered securities.

This taint on crypto assets has had serious and adverse consequences for market participants.

For many security tokens, liquidity has dried up and prices have dropped. Moreover, the regulatory (and possibly criminal) vulnerability of ICO promoters, the resulting market instability for existing security tokens, and the flight of American capital overseas where token sales remain unrestricted, make the whole situation a royal, Humpty Dumpty-scale mess.

It’s time to clean it up.

A model amnesty program

Without recriminations of government diffidence and regulatory defiance, the SEC and ICO participants must work together to find a reasonable market fix. Any solution should have two essential components:

(1) a vehicle for integrating a new asset class into the established supervisory structure; and

(2) a mechanism for protecting, to the extent possible, the value of substantial yet legally flawed investments.

Apparently, a dialogue among stakeholders has already begun. Reports indicate that major cryptocurrency backers, along with their lawyers and lobbyists, recently met with Commission officials to request “a broad exemption from federal oversight” that would nevertheless permit the SEC to intervene in ICOs “if a token issuer committed fraud.”

Although a “broad” regulatory exemption for unregistered security tokens is not likely in the offing, the SEC has designed and implemented an amnesty program for a different class of securities law violators that could also serve as a blueprint for unscrambling problematic ICOs.

This past February, the Commission’s Enforcement Division announced the “Share Class Selection Disclosure Initiative” (SCSD Initiative). The SCSD Initiative is an agency effort to resolve widespread and lingering violations of disclosure rules by investment advisors.

Many advisors have been selling certain classes of mutual fund shares to clients without telling them that they receive an advisor fee in connection with those shares and that other less expensive shares, that do not involve advisor fees, are available to purchase. This scenario plainly involves a material conflict of interest for investment advisors with fiduciary obligations.

Under the SCSD Initiative, investment advisors who self-report their violations are eligible to settle with the SEC according to standardized terms: (1) the issuance of a cease-and-desist order and censure on consent, in which an advisor neither admits nor denies the SEC’s findings; (2) the disgorgement of an advisor’s ill-gotten gains and the payment of interest on those revenues; and (3) the acceptance by an advisor of specified undertakings intended to correct the sale procedures that resulted in the disclosure violations.

Finally, in return for those commitments, the SEC Enforcement Division will recommend that the Commission impose no penalties on the self-reporting advisor.

The problem of unregistered security tokens warrants a similar approach.

How it would work

As some have already suggested, we basically need a regulatory do-over for the first wave of ICOs. An amnesty program like the SCSD Initiative could be one way of accomplishing that goal.

If engineered correctly, it would assimilate rogue security tokens into the fold of regulated instruments without rewarding prior violations of securities law. It could also provide issuers of unregistered security tokens with an ordered and more affordable way of resolving potentially ruinous civil liability under section 12 of the Securities Act of 1933 (establishing a cause of action for rescission or damages in connection with the sale of unregistered securities).

An ICO amnesty plan would need at least two core elements to meet those objectives.

To start, issuers of unregistered security tokens (let’s call them “old tokens”) would have to complete a formal SEC registration process for what are essentially replacement tokens (“new tokens”). Upon the approval of such a registration, issuers would have to swap old tokens for new tokens for all willing takers – a digital tender offer of sorts.

As an incentive to exchange old tokens for new ones, issuers would probably need to offer some additional consideration – possibly paid in new tokens rather than cash in order to preserve the company’s operating capital.

Furthermore, to avoid the statutory bars against investors waiving compliance with the securities laws, this second leg of the required amnesty transaction should be structured as a settlement and release of any Section 12 Claims against issuers of old tokens. As explained in the 2017 U.S. Appeals Court decision in Pasternack v. Schrader:

“as a general principle, whenever a party offers consideration to another in order to remedy an alleged violation of the securities laws, acceptance of that offer in exchange for a release of . . . claims is tantamount to establishing ‘compliance’ with the securities laws.”

Holdout investors that chose not to redeem their old tokens would, of course, retain their Section 12 Claims. But presumably the issuer would know the approximate number of holdouts in advance of self-reporting, and – in terms of liability – that number would have to be economically manageable for the company. Otherwise, there would be no point for the issuer to seek amnesty in the first place.

Indeed, an ICO amnesty process that included these elements could help to separate the good eggs from the bad. In evaluating the swap provision, investors would have to determine whether there is greater value in reaffirming their stake in the company or pursuing their rescission rights. That sober second look should promote efficient investor decisions that reflect the health and prospects of the underlying business enterprise.

Moreover, issuers of blatantly fraudulent ICOs have little chance of successfully registering their new tokens with the SEC, and therefore have little motivation to even try. That act of self-selection should significantly assist the SEC in identifying some of the most appropriate subjects for enforcement activity.

This proposed strategy to address widespread securities violations in the crypto-asset market is not intended as a comprehensive regulatory plan. To the contrary, it is presented merely as a conversation starter. Other legal considerations and possibly technological constraints will further shape the parameters of any final program, for sure.

It is urgent, however, that serious talks get underway. While regulators, entrepreneurs, and investors all walk on eggshells, innovation slows. Sometimes you just have to break a few eggs to move forward.

‘Cryptojacking’ Software Attack Hits Hundreds of Websites

‘Cryptojacking’ Software Attack Hits Hundreds of Websites

Hackers have injected hundreds of websites running the Drupal content management system with malicious software used to mine the cryptocurrency monero.

This latest incident was uncovered by Troy Mursch, the security researcher behind the website Bad Packets Report. He wrote Saturday that more than 300 sites had been compromised by hackers who installed the browser mining software Coinhive, which mines the cryptocurrency monero, by exploiting a vulnerability in an outdated version of the Drupal content management system (CMS).

Cryptojacking,” as similar attacks are called, has become a common problem in recent months. Whereas hackers used to favor ransom attacks – in which they would scramble victims’ data and demand ransoms in bitcoin or another cryptocurrency in order to decrypt it – they now increasingly infect websites with software that harnesses visitors’ computers to mine cryptocurrency on the attackers’ behalf.

Mursch told CoinDesk that while cryptojacking is not as overt as ransomware, it “continues to be a problem – especially for website operators.”

He explained:

“This is because Coinhive and other cryptojacking services (malware) are simply done with JavaScript. Every modern browser and device can run JavaScript, so as such, everybody can mine cryptocurrency and unfortunately Coinhive has been used and abused time and time again. [In] this particular case, Drupal users need to update [as soon as possible].”

Affected sites include the San Diego Zoo, the National Labor Relations Board, the City of Marion, Ohio, the University of Aleppo, the Ringling College of Art and Design and the government of Chihuahua, Mexico. A full list of affected sites is available on this spreadsheet.

Visitors to affected websites may not even notice that their computers are running the cryptographic functions used to generate monero for hackers. The attacks slow users computers down, however, and can cause wear and tear on computers’ processors.

Not all Coinhive users are malicious, however. Salon, a news outlet, and UNICEF use the software to raise funds, but only run it with visitors’ permission.

JPMorgan Seeks Patent for Blockchain-Powered Interbank Payments

JPMorgan Seeks Patent for Blockchain-Powered Interbank Payments

JPMorgan Chase is seeking to patent a system for using distributed ledgers as a way to facilitate and reconcile financial transactions, newly-released filings show.

In a patent application published by the U.S. Patent and Trademark Office on Thursday (which was originally submitted last October), JPMorgan outlined a system that uses distributed ledgers to record payments being sent from one bank to another using a peer-to-peer network. According to the bank, the tech’s use would provide “a unique system for recording transactions and storing data.”

The ability to replicate that data on the ledge across a public or private distribution network offers another benefit, the filing notes.

JPMorgan goes on to explain:

“In one embodiment, a method for processing network payments using a distributed ledger may include: (1) a payment originator initiating a payment instruction to a payment beneficiary; (2) a payment originator bank posting and committing the payment instruction to a distributed ledger on a peer-to-peer network; (3) the payment beneficiary bank posting and committing the payment instruction to the distributed ledger on a peer-to-peer network; and (4) the payment originator bank validating and processing the payment through a payment originator bank internal system and debiting an originator account.”

A blockchain could improve upon existing systems by allowing real-time settlement more cheaply and quickly than is possible at present, according to the bank.

“For a cross-border payment to be made from a payment organization to a payment beneficiary, a number of messages must be sent between the banks and clearing houses involved in processing the transaction. This often results in a slow transaction, as there are may be delays in service due to correspondent banking, messaging networks, and clearing intermediaries in the payment flow,” the application explains.

It’s perhaps unsurprising that JPMorgan would seek a patent for its blockchain-related work in the area of interbank payments. The bank launched a platform for just that kind of service, built on ethereum-offshoot Quorum, days before it filed the patent application.

“Blockchain capabilities have allowed us to rethink how critical information can be sourced and exchanged between global banks,” Emma Loftus, head of global payments and foreign exchange for JPMorgan Treasury Services, said at the time.

CFTC Officials Want Close Cooperation With SEC on Crypto Rules

CFTC Officials Want Close Cooperation With SEC on Crypto Rules

Two officials at the Commodity Futures Trading Commission (CFTC) spoke about regulating cryptocurrencies this week, stressing the need for cooperation between their agency and another powerful U.S. regulator, the Securities and Exchange Commission (SEC).

Speaking at the FIA Law and Compliance conference in Washington, D.C., on Wednesday, commissioner Brian Quintenz spoke about “an effort that is underway at both the SEC and CFTC to coordinate and harmonize regulatory oversight.”

Quintenz did not focus on cryptocurrencies specifically, but when he did talk about them, the emphasis was on “fraud, market manipulation and disruptive trading involving virtual currency.”

He reminded the audience that the CFTC has set up a special task force “to prosecute fraud in this evolving asset class,” and stressed the importance of cooperating with the SEC so as to “ensure that differences in product nomenclature do not enable bad actors to slip through jurisdictional cracks.”

Examples of recent cooperation between the SEC and CFTC include the cases against the alleged My Big Coin and CabbageTech cryptocurrency scams, according to an annotated transcript of Quintenz’s remarks.

Commissioner Rostin Behnam, who spoke Thursday morning, struck a much softer tone on cryptocurrencies. He noted that CME Group and Cboe’s introduction of bitcoin futures required a “hard and fast introduction” to bitcoin and blockchain technology.

He expressed concern that cryptocurrencies could present a threat to financial stability, if not now then down the line. He urged regulators – who often find themselves “scurrying to keep pace with swift innovations” – to act before that threat appears.

Behnam acknowledged that not everything in the cryptocurrency markets is a fraud and said that policy should “reflect an understanding of FinTech and address the concerns and needs of all stakeholders.”

The commissioner was skeptical of the cryptocurrency industry’s attempt to craft its own regulations, since “their motives may be too focused on supporting industry growth.” Even so, he welcomed market participants to help craft policy:

“Let’s work together, have an honest conversation, and seek solutions that focus on an inclusive regulatory landscape.”

He added: “Whatever your issue, my door is open.”

Bitmain’s Latest Crypto ASIC Can Mine Zcash

Bitmain’s Latest Crypto ASIC Can Mine Zcash

Bitmain has unveiled a new cryptocurrency mining hardware product dedicated to the Equihash algorithm, which is used by the privacy-oriented cryptocurrency zcash.

The Equihash application-specific integrated circuit (ASIC) was announced Thursday, with shipments expected to begin in June, according to Bitmain’s website. The Antminer Z9 mini’s release comes exactly a month after the formal debut of Bitmain’s ethereum-focused ASIC.

Bitmain tweeted its announcement shortly after 6:30 a.m. EDT:

“Pleased to announce the Antminer Z9 mini, an ASIC miner to mine #Equihash-based cryptocurrencies. To prevent hoarding and to let more individuals worldwide get one, we’ve set a limit of one miner per user.

ASICs have been introduced for other hash algorithms in the past, leading to sea-changes in the mining industries of bitcoin, litecoin and, most recently, ether. When ASICs become available for a cryptocurrency, GPUs (graphical processing units) or especially CPUs (central processing units) become less attractive options for would-be miners.

This fact has made ASICs controversial since their introduction tends to centralize mining into a few large operations. Opponents of ASIC mining argue that this trend is antithetical to the decentralized intent of cryptocurrencies, and some projects’ developers have promised to change their networks’ underlying functions to thwart manufacturers like Bitmain.

Zooko Wilcox, zcash’s founder, commented on the prospect of ASIC miners being developed for zcash Wednesday.

“I’m really chagrined that I let it sound like we were committing to a social contract of ongoing ASIC-resistance,” he wrote, adding:

“That is absolutely never what I had intended to commit to, because (a) I always thought that it would probably become impossible long-term, and (b) I always believed that there was a fundamental trade-off between widespread distribution of the coins on one hand, and miners having a large sunk-cost investment into the coin on the other hand, and that the latter might eventually prove to be valuable for attack-resistance and network stability.”

And as one moderator on the official zcash forum put it: “The current state of the ASIC resistance conversation is: still being debated.”

EOS Is Nearing An All-Time Price High

EOS Is Nearing An All-Time Price High

EOS is reporting gains on a down day for the wider crypto markets and may soon rally to fresh all-time highs.

As of writing, the world’s fifth largest cryptocurrency by market valuation is changing hands at $14.61 – up 7.6 percent in the last 24 hours, according to CoinMarketCap.

Meanwhile, most other major coins are flashing red. For instance, bitcoin is reporting 1.2 percent drop, bitcoin cash and IOTA are down 12 percent each and names like ethereum (ETH), Ripple (XRP), cardano and stellar are down at least 8 percent each.

The good news for EOS does not end here: it’s also the biggest gainer among the top 10 cryptocurrencies by market cap on a week-on-week basis.

EOS’ 62 percent rally is backed by a notable 556 percent rise in daily trading volumes, indicating that strong hands are at play and the rally is here to stay.

It’s worth noting that EOS rallied sharply in the run-up to the April 15 eosDAC airdrop and, more importantly, remained well bid after the event – something of a surprise since cryptocurrencies usually rally ahead of their airdrops and then drop in value afterwards.

This resilience could be associated with the significant interest within the investor community about the platform’s mainnnet launch. Further, big names like Bitfinex, Huobi and Antpool are running as candidates to be EOS block producers (“supernodes” that will support the mainnet) and that may have boosted the token’s appeal.

Clearly, EOS is in the news for all the right reasons, so a rally to record highs cannot be ruled out. The technical chart (prices as per Bitfinex) also back up that possibility.

EOS daily chart

The high volume bull flag breakout (witnessed on April 11) signaled a bull market revival and opened the doors for a retest of the record high of $18.67.  Accordingly, EOS rallied to $16.14 Tuesday – the highest level since Jan. 13 – before falling to $14.18 today.

The pullback could be extended further toward $11, as the daily relative strength index (RSI) shows overbought conditions.

That said, the outlook would still remain bullish, as suggested by the bull flag breakout and the ascending (bullish biased) 10-day moving average (MA).


  • EOS will likely set fresh record highs above $18.67 (Jan. 13 high) in the near-term.
  • Only a daily close (as per UTC) below the ascending 10-day MA, currently at $10.98, would abort the bullish view.
  • A break below $7.80 (April 16 low) would confirm a bullish-to-bearish trend change.