Cryptocurrency Scams Are Now Among the SEC’s Top Enforcement Priorities

November 2, 2018, 3:11 PM UTC

An annual report by the Securities and Exchange Commission reveals how digital currency scams, which did not merit a mention two years ago, are among the agency’s top enforcement priorities.

The SEC is focused in particular on so-called Initial Coin Offerings (ICOs), which involve the sale of digital tokens related to blockchain projects. While many such projects are complete or on their way to fruition, many others have failed to deliver on their promises or turned out to be outright scams.

“In the past year, the [enforcement] Division has opened dozens of investigations involving ICOs and digital assets, many of which were ongoing at the close of FY 2018,” the SEC states in a section of the report titled “ICOs and Digital Assets.”

In another significant sentence, the agency also notes that, while many of its investigations have turned on fraud, it is also pursuing cases to “ensure compliance with the registration requirements of the federal securities laws.”

The issue of securities registration is currently a pre-occupation of many cryptocurrency companies because, unlike in the past, they can not use an ICO to sell tokens to the general public.

While numerous companies raised tens, and even hundreds, of millions of dollars through ICOs prior to mid-2017, such activity has fallen off sharply since the SEC indicated that it regards nearly all digital tokens as securities.

The report called attention to several recent enforcement actions, including those involving ICOs promoted by celebrities, and against brokers who unlawfully operated an “ICO Superstore.”

The agency also, however, implicitly acknowledged the digital token economy has positive attributes, stating “The Enforcement Division recognizes the need to balance its mission to protect investors from the risk posed by fraud and registration violations against the risk of stifling innovation and legitimate capital formation.”

The annual report also notes the SEC has shifted agency resources to support cyber-security and ICO investigations, which it describes as market segments with “emerging risks.” It also touted the SEC’s new Cyber Unit, which it says brought 20 stand-alone cases in 2018, including those involving ICOs.

The new prevalence of cryptocurrency investigations is reflected in the fact that the term ICOs is mentioned dozens of times in the 2018, compared to only three times last. In the 2016 report, the term does not appear at all. Meanwhile, earlier this year, the SEC launched a fake website selling “Howie Coins” as a means to warn investors about ICO fraud.