Remember when cryptocurrency was going to be a big deal? Bitcoin and other alt-coins were going to replace money and change the way the world does business. Yeah, we’re still waiting on all that – and it might be a good thing. Because in the meantime, the Securities and Exchange Commission (SEC) is working out the crypto kinks in its enforcement regime. Here’s a roundup of some of the latest crypto-related developments with the Commission.
Crypto Companies Missing Enforcement Deadlines
According to a new report, the SEC is failing in its attempts to push some cryptocurrency startups to clean up their acts.
The Wall Street Journal (WSJ) checked the status of a series of settlements between the SEC and crypto startups that called for the companies to either make investors whole or disclose more information to the public. The deals with the crypto firms stemmed from the fundraising deluge of 2017 that saw billions of dollars in capital pour into digital currencies. In some cases, the fundraising activities were deemed illegal, leading the SEC to trade reduced fines in exchange for compliance concessions from the token issuers.
The WSJ’s investigation indicates that the crypto firms aren’t living up to their end of the bargains. Two of the startups blew through an SEC-mandated Oct. 16 deadline to refund investors’ money, according to the report. Airfox provides mobile banking services in developing countries per its SEC-mandated Form 10. Paragon Coin, is supplying database technology to the cannabis sector.
Washington, D.C.-based Gladius Network LLC, which provides cybersecurity services, also reached a settlement with the Commission over its sale of digital tokens to investors. Because Gladius reported its own violations, the SEC didn’t force the company to pay a penalty. However, the WSJ determined that it has yet to file a registration statement with the Commission, one of the terms of its deal.
To be fair, the three companies said they received extensions from the Commission to meet their conditions – a claim that the agency declined to confirm to the WSJ. As of the writing of this blog post, the Gladius website still reports that it has until November 18 to register its tokens. Even if the companies received a reprieve, though, their inability to meet the agreed-upon terms is not a good look for the cryptocurrency movement.
SEC and Telegram Dig in Their Heels
The SEC has secured a temporary restraining order against Telegram, an encrypted messaging service that claims to have up to 200 million users worldwide, and that was blocked by Russia last year. Like its sister suit, Kik Interactive, this is another legal battle in the U.S. District Court for the Southern District of New York that may ultimately boil down to the age-old question of whether a cryptocurrency is a security. The SEC has said yes, but last week, lawyers for messaging service Telegram objected to that characterization. There’s plenty on the line; Telegram sold $1.7 billion worth of its GRAM tokens in 2018. The SEC deemed the initial coin offering (ICO) to be a sale of unregistered securities.
Telegram’s investors, at least, are expressing a certain amount of confidence that they are going to come out ahead here. Despite the injunction, they voted against a measure that could have refunded more than three-quarters of their investment.
Peirce Pitches Safe Harbor
Not everyone at the SEC is onboard with the agency’s stance toward crypto regulation. Outspoken commissioner Hester Peirce bemoaned the “lack of a workable regulatory framework” for cryptocurrencies as part of her remarks at a securities regulation event earlier this month. A hodgepodge of enforcement actions and staff guidance “has hindered innovation and growth” of cryptocurrency according to the commissioner known for her perceived affinity for digital currency.
“Of particular concern is that these enforcement actions and guidance pieces, taken together, offer no clear path for a functioning token network to emerge,” said Pierce, who is advocating for a safe-harbor period to free up crypto companies to build out token networks.
Her comments suggest that the SEC has had an uneven record of enforcement in the crypto area. But given that the performance of crypto companies themselves has been equally rocky, if not more so, her proposal will likely meet with some resistance.