Caveat Emptor: Blockchain and Crypto Companies under SEC Scrutiny

The mania surrounding bitcoin and other cryptocurrencies has now overflowed onto the underlying technology. The real value of cryptocurrencies is hotly in dispute, but there is consensus that the underlying blockchain technology has applications that extend far beyond its connections to cryptocurrency. IBM’s Martin Schroeter recently told CNBC (http://ibn.fm/Ln0L9), “Blockchain, the digital record-keeping method that exploded in popularity in conjunction with the cryptocurrency craze, will change the way the world makes transactions.” Unfortunately, the unscrupulous will always make every conceivable attempt to capitalize on a current craze and redouble efforts during transformative events.

Spring-boarding off the cryptocurrency craze, little-known companies have been announcing plans to enter the bitcoin industry or into its underlying distributed ledger blockchain technology. An encrypted electronic ledger, blockchain has the potential to dramatically reduce business costs, efficiently streamline operations and provide data security and reliability. Replicated across a network of multiple computer nodes, the records keeping system is decentralized, self-monitored by all the linked computers and eliminates the need for supervision and administration of records. Little wonder that IBM as well as multiple other well-known global companies have begun blockchain initiatives.

However, public companies that change their names or business models with no real purpose other than capitalizing on the hype surrounding blockchain technology are now under Securities and Exchange Commission (SEC) scrutiny. Detailed in a recent Reuters article (http://ibn.fm/kldP6), SEC Chairman Jay Clayton cautioned that it was not acceptable for companies without a meaningful track record in the sector to dabble in blockchain technology, change their name, then offer investors securities without providing adequate disclosures around the risks involved.

This latest SEC salvo targets the nefarious underbelly of crypto-mania. The SEC has temporarily suspended trading in unwarranted high flyers and “is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering,” as noted by Clayton. Clayton also said the SEC had seen unsettling evidence that legal professionals have incorrectly advised clients they don’t have to comply with federal securities laws in initial coin offerings (ICOs) where cryptocurrency start-ups solicit funds from investors.

The SEC’s warnings are in line with other countries’ efforts around the globe to limit speculation in cryptocurrencies. The SEC has warned investors about cryptocurrency frauds and openly stated that ICO fundraisings should comply with securities laws.

If double-digit price swings and threats of government intervention aren’t enough to keep crypto investors on edge, a new research report from Ernst & Young (http://ibn.fm/301I2) reveals that more than 10 percent of funds raised through “initial coin offerings” are either lost or stolen in hacker attacks.

The SEC is right to reign in fraudulent crypto-mania. Until controls are established and markets regulated, caveat emptor (buyer beware).

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