CFTC Warns Crypto Investors About Pump-and-Dumps

January was one of the strongest months yet for the bustling world of initial coin offerings (ICOs), as billions poured into the market in spite of growing regulatory scrutiny in places like China and the United States.

ICOs by the Numbers

Startups in January raised $1.18 billion via ICO crowdfunding campaigns, according to data provider ICOData. The total capital raise for the month was superseded only by the December tally, which came in at a whopping $1.67 billion.

So far in February, $192 million has poured into coin offerings, bringing the yearly total to $1.38 billion spread out across 176 projects.

The ICO market is coming off a record-breaking year, with more than $6 billion in funding raised. With Telegram set to launch an ICO, 2018 could be the market’s biggest year yet. The hugely popular messaging app is planning to generate $2 billion through public and private sales, according to sources familiar with the matter.

Even with record amounts flowing into the market, many companies are struggling to reach their target funding amount. A massive influx of projects combined with greater investor scrutiny have made the market much more competitive than it was even six months ago.

There are currently more than 1,500 cryptocurrencies in circulation, with many more planned in the coming weeks. Outside of the top 200, few coins are trading for more than a dollar.

Regulation and the Way Forward

The January feat is even more impressive considering the growing number of ICOs barring U.S. citizens and permanent residents from participating. Although ICOs are no illegal in the United States, federal regulators are keeping a close eye on the market for signs of securities violations. The Securities and Exchange Commission (SEC) – the regulator in question – does not care if a project labels its token a “utility” token; if it provides the same function of a security, it will be deemed such.

That’s one of the core messages SEC Chairman Jay Clayton will deliver on Tuesday in a prepared testimony before the Senate Banking Committee.

Testifying before lawmakers, Clayton will insist that:

“Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to
contain the hallmarks of a security under U.S. law.”

Many startups are simply foregoing the American market entirely to ensure they don’t unknowingly violate the SEC’s stern guidelines, as was the cast last summer when The DAO was deemed to be a security token.

ICOs have been illegal in China since September, but that hasn’t stopped keen investors from participating. Now, Beijing’s so-called “Great Firewall of China” is ratcheting up efforts to block access to foreign services.

Fortune recently quoted a central bank-affiliated newspaper in stating, “Overseas transactions and regulatory evasion have resumed.”

The same source indicated that the People’s Bank of China (PBOC) will “tighten regulations” on citizens participating in overseas cryptocurrency markets, including ICOs.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

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