The SEC Is Now Retroactively Punishing ICOs, Putting All ICO Cryptocurrencies at Risk

October 2, 2019 / by Zachary Mashiach

On Sept. 30, the SEC issued a cease and desist order in addition to roughly $225,000 of fines against Nebulous Inc., the company behind the cloud storage cryptocurrency Siacoin (SC). The SEC has issued many judgments against cryptocurrencies that have launched via initial coin offerings (ICOs), as will be detailed in this article, but the remarkable thing about the Siacoin (SC) judgment is it is retroactive by several years.

The SEC first issued guidance regarding ICOs in July 2017. At that point, the agency declared that any new cryptocurrency that is sold to investors who expect profit, and this sale is conducted by a centralized company, would be considered a security and therefore must follow securities regulations. 

ICOs that occurred in the United States after this guidance was issued in July 2017 were clearly violating securities regulations and were at risk of being sued by the SEC. Notably, EOS has been fined $24 million, the Kin ICO conducted by Kik is in a lawsuit that is bringing the company to its knees, and the SEC has shut down at least a dozen other ICOs in 2018, with Paragon (PRG) and Airfox (AIR) being the first ICOs to receive civil penalties

The SEC declared that the Paragon (PRG) and Airfox (AIR) enforcement actions likely would be a model for future ICO crackdowns, with the ICOs being fined and investors being given a chance to be reimbursed. Then the ICOs would be given a chance to become compliant with regulations although without any guarantee of approval. This is a catastrophic precedent because most ICOs have lost value since launching, so investors seeking reimbursement would likely bankrupt the ICO.

The new precedent set by the Siacoin (SC) judgment is that many ICOs are now within the realm of the SEC’s jurisdiction, no matter how many years ago they launched. 

Siacoin (SC) conducted its ICO in 2014, approximately three years before the SEC ever issued guidance, declaring that most ICOs need to follow securities regulations. Siacoin (SC) raised $120,000 during their ICO, yet the fine is $225,000. The harshest part of the judgment is the cease and desist order against any further securities violations, which is a difficult task now that Siacoin (SC) has been declared a security.

Thus, the Siacoin (SC) judgment has established the precedent that any ICO can be sued by the SEC even if it launched years before the SEC declared that unregistered ICOs are illegal. This represents a threat to hundreds or even thousands of cryptocurrencies that launched via ICOs. It also represents another nail in the coffin of the ICO bubble. 

The Bitcoin (BTC) Dominance percentage, which is a measure of the strength of Bitcoin (BTC) versus all alternative cryptocurrencies, has risen from 33% at the peak of the ICO bubble in early 2018 to 68% currently. This shows that the altcoin market has drastically contracted during that time, and part of the reason for this may be the escalating enforcement actions by the SEC against cryptocurrencies that launched with ICOs.