August 9, 2017 / 6:04 PM / 2 years ago

SEC registration for digital coin offerings faces challenges, lack of infrastructure

NEW YORK (Thomson Reuters Regulatory Intelligence) - The path to making digital-token offerings compliant with U.S. securities law will not be easy, with obstacles including a lack of infrastructure for the many startups, companies and exchanges operating in the crypto-currency sector, experts said. Some also warn of a wave of potential lawsuits against promoters of such investments.

A Bitcoin (virtual currency) logo is pictured on a door in an illustration picture taken at La Maison du Bitcoin in Paris May 27, 2015.

The U.S. Securities and Exchange Commission announced (here that certain initial coin offerings are considered securities and therefore subject to registration with the SEC under U.S. law. While the agency’s announcement came as little surprise to market participants, and many called it a positive step to rein in fraudulent offerings, the process of registering tokens will not be straightforward or easy.

“I think the question is whether as a practical matter anybody could register an initial coin offering,” said Joseph Hall, partner at Davis Polk, the law firm.

“If they are securities, then the intermediaries who are dealing with them have to be registered,” he added. “But the primary exchanges (on which tokens are traded) are not registered. There’s not an infrastructure out there to handle these offerings ... The bitcoin ecosystem is not set up to handle tokens as securities.”

Initial coin offerings (ICOs) are a means of crowdfunding for blockchain technology companies, allowing digital currency entrepreneurs to raise money quickly by creating and selling digital “tokens” with no regulatory oversight. Investors in such offerings do not have ownership rights, as in U.S. equity initial public offerings, but rather are betting on blockchain projects to deliver on the expected benefits of their business models. Once the tokens are issued they trade on various exchanges, which are also unregulated.

Some of the world’s largest exchanges, such as Bithumb and, which are domiciled outside the U.S., and trade well known coins such as Ethereum, Bitcoin and Litecoin, are not currently registered with the SEC, or any U.S. regulator. Following last week’s SEC announcement, other foreign regulators have said they might take a similar approach.

Authorities in Singapore, one of the most popular locations for initial coin offerings, announced last week that token sales might be subject to the country’s securities laws (here). The top regulator, the Monetary Authority of Singapore, said it “has observed that the function of digital tokens has evolved beyond just being a virtual currency ... digital tokens may represent ownership or a security interest over an issuer’s assets or property.”

While a decision by Singapore to follow the U.S. lead would be a step towards harmonizing international oversight of the digital currency world, gaps remain in the financial plumbing needed to enable market participants to register and comply.

“There are a lot of things that have to fall into place,” said Ryan Schoen, vice president at Washington Analysis LLC, a research boutique that analyzes public policy in financial markets. When comparing initial coin offerings to the U.S. equities markets, Schoen said: “Every single entity and single asset and service that touches those markets is unbelievably regulated. There is none of that in the context of ICOs.”


When and whether the SEC will grant licenses to digital exchanges is highly uncertain, say observers, but a recent decision by its fellow Washington regulator, the Commodity Futures Trading Commission, might put pressure on the securities regulator to follow suit.

In July, the CFTC granted New York-based LedgerX, a bitcoin options exchange(here), the first license ever to clear and settle derivative contracts for digital currencies. The license authorizes LedgerX to provide clearing services for fully-collateralized digital currency swaps. The CFTC has been out in front of other U.S. regulators in embracing and promoting financial innovation, establishing LabCFTC in June (here, an initiative to engage emerging fintech and regtech companies.

While acknowledging that the CFTC’s decision on LedgerX demonstrates an active approach to digital coins, Schoen thinks the implications of the move may not be well understood for some time, given the host of other issues that need to be addressed.

“(The CFTC) have kind put of the cart before the horse in terms of some of the decisions we have to make,” he said.


While many unanswered questions remain regarding the outlook for ICOs, a more immediate issue for those behind such offerings may be class-action lawsuits by individuals who have lost considerable sums in fraudulent schemes.

Hall of Davis Polk, who was previously a senior official at the SEC, said what has gone unremarked in light of the regulator’s decision is the potential for a wave of lawsuits against the promoters of ICOs that have run afoul of the law.

“You’ve got a bunch of people who have promoted these things not through a legal structure,” said Hall. “A lot of these people have a lot of wealth and are perfect targets by plaintiff lawyers.”

Earlier this year Japan became the first country to regulate exchanges at the national level, due in part to the collapse of Mt. Gox, a bitcoin exchange that lost hundreds of millions of dollars. A trial is now underway, accusing the former chief executive of the firm, Mark Karpeles, of embezzlement. Karpeles denies the charges, blaming hackers for the lost bitcoins.

The Mt. Gox case may be one of the most high profile scandals in the bitcoin world, but there are many others. It may be only a matter of time for more legal actions to unfold.

“You’ve got this cadre of plaintiff lawyers who have all sorts of algorithms. The minute one of them figures it out, that the promoters have a lot of wealth, it will happen,” said Hall.

(Henry Engler is a North American Regulatory Intelligence Editor for Thomson Reuters Regulatory Intelligence. He is a former financial industry compliance consultant and executive, and earlier served as a financial journalist with Reuters. Email Henry at

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Aug. 2. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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