North American regulators have announced a widespread enforcement action known as “Operation Crypto-Sweep,” which is highly likely to catch both fraudulent activity and honest cryptocurrency projects who failed to cross their T’s and dot their I’s when filing regulatory paperwork. The Operation Crypto-Sweep Task Force consists of 40 U.S. States and Canadian provinces led by the North American Securities Administrators Association.
“The market for cryptocurrency investments is saturated with fraud, and our work is only revealing the tip of the iceberg,” says Joseph Rotunda, director of enforcement at the Texas State Securities Board.
Blockchain Startups Likely to Keep Heads Down
Although fighting fraud is always a good thing, this is likely to spook honest startups and development teams in the cryptocurrency and blockchain niche who can’t afford an attorney who can help them navigate the legal and regulatory minefield. CEO of Ditto PR Trey Ditto said of the crackdown:
“What I don’t like is to see these crypto and blockchain startups saddled in legal fees and scared to talk more publicly about their projects because of operations like this. There’s a difference between rounding up the bad guys and scaring the good guys.”
Crackdowns like this will create additional problems for startups who already have trouble getting noticed by investors and potential clients. These startups are likely to be have been started by developers who specialize in code, not law and regulation, and therefore find the regulatory environment to be highly confusing.
Regulatory bodies like the SEC and CFTC have added to the confusion by sending mixed messages on how cryptocurrencies and tokens will be regulated. The problem has especially been exacerbated by the suggestion that Ethereum will be considered a security, even though it would logically not count as shares in any particular company.
Because regulators are being obtuse, possibly out of a misunderstanding of what cryptocurrencies and tokens are, honest blockchain startups are highly likely to have trouble raising capital in some of the wealthiest nations in the world, such as the U.S. and Canada. Without capital, they will have trouble marketing their creations to the markets that need them most. As Ditto put it:
“What the community needs is more defined language from the SEC. Yes, the SEC and CFTC have made comments around securities versus utility tokens, but really good projects are completely frozen or worried about talking publicly until the SEC sends out a more formalized mandate. “
Opportunity Suppressed Is Opportunity Lost
Despite the birth of Title III of the Jumpstart Our Business Startups Act, which allows non-accredited investors to participate in opportunities presented by startups who turn to crowdfunding to raise capital, would-be investors are often not aware of the opportunities created by this law. Most people who have only limited experience with investment may not even be clear on what KYC, AML, and proper due diligence are, let alone which hoops they will have to jump through in order to invest in a startup.
Which means that individuals who might have only have $200 to throw into the pot can participate in an ICO because it’s basically crowdfunding. Right? Well, first they have to get past regulatory hurdles that require them to verify their identities, including getting a good picture of their photo ID. I can tell you from experience that it’s really tough to get a picture of my driver’s license that’s good enough for the exchanges to accept just using my cell phone camera and it’s tough for me to justify spending just over $200 on a camera that might actually be able to get the job done. How am I going to meet KYC requirements without spending the money that I would have otherwise invested in a promising ICO? And how do strict KYC requirements help potential investors with a few bucks to contribute and no photo ID altogether?
I could wait and buy the more promising ERC-20 tokens on the “secondhand” market using decentralized exchanges like IDEX, but that doesn’t help entrepreneurs who struggle to reach investors in a regulatory environment that is so confusing that many startups who decide to run an ICO won’t even let U.S.-based investors have a chance to buy tokens during their sale. They could dump any unsold tokens on decentralized exchanges, but that often has the effect of ticking off investors who bought during the ICO if and when they find out about it.
The problem is exacerbated by the FUD generated by crackdowns like Operation Crypto-Sweep and lack of clarity coming from regulators. Non-accredited investors may avoid an otherwise promising ICO if they get the impression that most ICOs are unregulated scams. Then, when one project that they might have seriously considered inevitably goes big, these would-be investors will be kicking themselves for not getting in on the opportunity early. So much for Title III’s point of boosting investment in startups.