The Legal Woes of ICOs
An Initial Coin Offering (ICO) is a new form of raising funds by entrepreneurs looking to start their own cryptocurrency venture. Investopedia comments on the motivation for ICOs stemming from the relatively unregulated nature of most cryptocurrencies: “An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks.”
Naturally, the unregulated landscape of cryptocurrencies makes lawsuits by investors who’ve lost big much more problematic for founders due to the grey area of the subject. While a lot of investors have begun to turn away from ICOs due to their bad rap, new blockchain-based technologies such as tokens have started to gain traction. This has paved the way for a number of services, such as those involving crypto games, to emerge.
Lawsuits Targeting The Lack of Regulation For ICOs
While the lack of regulations makes ICOs an attractive investment in the sense that almost anyone with money can find a way to contribute, they also make the owners of that funding method an unwitting target for lawsuits. Because of the straightforward nature of ICOs as instruments to gain funding for a particular cryptocurrency, the SEC has actually opened up a number of probes to ensure that there is no foul play occurring.
The Wall Street Journal summarizes the problems with lax regulation in their documentation of the February crackdown on ICOs by the SEC, writing that: “The wave of subpoenas includes demands for information about the structure for sales and pre-sales of the ICOs, which aren’t bound by the same rigorous rules that govern public offerings…” Clearly, the market for cryptocurrencies has attracted enough public interest to the point where the government can no longer simply turn a blind eye to the matter.
One of the major cryptocurrencies currently taking legal fire is Ripple (XRP), as a class-action lawsuit has recently been filed against the founders of the currency. The suit accuses the founders of running a “never-ending ICO” and being dishonest with regard to the exact nature of the investment as well as with regard to how its financials were portrayed. The suit contests the unregulated nature of XRP by claiming that it should be treated and regulated as a security.
Despite these incidents, the relatively thorough reporting coupled with the open-source nature of the technology means that scammers and those malicious intentions usually will be rooted out quickly by the community. For instance, consider how crypto casinos have flourished without the need to put on elaborate airs for investors due to the straightforward nature of the business model and its compatibility with decentralization.
ICOs and Blockchain Exchanges That Actually Are Scams
Now, whether or not XRP deserves to be classified as a security or not is a debatable point that should be given a fair amount of scrutiny. The consequences and the extent of appropriate regulation exist at the forefront of a controversial discussion between supporters and naysayers that is left largely unresolved. However, one thing that is certainly not helping the case of ICOs and blockchain technologies in general are the impersonators and scam artists taking advantage of the regulatory blindspot and hype to defraud investors.
One of the most well-known exit scams in recent days manifested in the Bitconnect debacle, which resulted in regulators in Texas and North Carolina intervening to send out cease-and-desist letters to the operators of the site. Since then, a number of individuals caught in the wake of Bitconnect’s shady business have banded together to file a class-action lawsuit in an attempt to prosecute those responsible for the Ponzi scheme.
Due to the fact that the blockchain community contains people who are genuinely interested in the technology and its potential along with its fair share of bad actors, regulation becomes more and more urgent as governments and individuals try to deal with what should be done to curb bad and unethical behavior. While the XRP and Bitconnect lawsuit are clearly different in quality and context, the fact that they both argue similar points about the necessity of regulating cryptocurrency demonstrates how much of a toss-up the issue of regulation is.
Ignorance is perhaps the most dangerous aspect of cryptocurrencies, since the complex basis of blockchain technology means that the threshold for understanding and literacy in the subject is much higher. This means that a larger proportion of the investors is like to not have done the necessary due diligence before making an investment. It is not uncommon for a group of scammers to round together a set of unwitting investors, raise money through their ICO, and then disappear off the face of the earth. In fact, that’s exactly how exit scammers in Vietnam were able to make off with $660,000 from the investments of 32,000 people in the Pincoin token.
The Future Status of Blockchain’s Legitimacy
A common thread that permeates discussions relating to the value of blockchain relate to the legitimacy of the currencies that branch from that technology. This is because the trust of the people determines the worth of any particular cryptocurrency. Trust, of course, is based on legitimacy. The historical downturn of Bitcoin as a result of the Mt. Gox scandal is perhaps the best evidence of this relationship between legitimacy and value.
At the moment, the prices of Bitcoin appear to have stabilized during the past few weeks. In the midst of this stability, institutional investors such as Goldman Sachs are finally beginning to make their forays into trading cryptocurrencies. Simultaneously, a number of governments across the globe are planning to test out the currency in provisional circumstances, with Sweden as a notable example.
In fact, one area that has been gaining traction involves tokens. The emergence of tokens in ethereum in the form of work tokens and usage tokens to represent a variety of activities requiring fast and decentralized transactions shows a potential pathway forward.
Bitcoin roulette along with a number of other games are the first of many to begin adopting and utilizing this exciting and new tech in a bid to make transactions smoother and more streamlined. As blockchain matures from unreliable or seedy ICOs, the uses of tokens along with other diversity in technological innovation will help drive the industry towards greater acceptance and legitimacy.
