IOSCO Raises Concerns about Cryptocurrency Offerings

The International Organization of Securities Commissions (IOSCO) has issued a communiqué discussing potential issues related to initial coin offerings (ICOs). IOSCO met in October 2017 and discussed the growing usage of ICOs. IOSCO then issued a statement to its members and noted the various approaches to ICOs taken by members.

ICOs involve the creation of digital tokens using distributed ledger technology and the sale to investors of those digital tokens in return for a cryptocurrency such as Bitcoin or Ether. The sales can be by auction or through subscription.

In the communiqué, IOSCO warns that ICOs are risky investments, as follows:

  • Lack of standardisation of legal and regulatory status
  • Investors’ entire investments may be at risk due to the highly speculative nature of these ICOs
  • Online targeting and distribution of ICOs to retail investors may violate applicable laws
  • The offerings may be fraudulent.   

The IOSCO communiqué is available on this link. http://www.iosco.org/news/pdf/IOSCONEWS485.pdf

Communications by securities regulators on ICOs is available on this link. http://www.iosco.org/publications/?subsection=ico-statements 

SEC Staff Warns of Risks of Cryptocurrency ETFs

The staff in the Division of Investment Management of the US Securities and Exchange (SEC) raised concerns about cryptocurrency Exchange Traded Funds (ETFs) and other investment funds in a letter sent to two Wall Street trade groups.

The letter indicates that “the growth in cryptocurrencies and cryptocurrency-related products has attracted significant attention, and we have seen interest among sponsors in offering registered funds that would hold these new digital products. As we have in the past, the Division stands ready to engage in dialogue with sponsors regarding the potential development of these funds. We believe, however, that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors”.   

The letter goes on to detail concerns with cryptocurrency ETFs and investment funds in several areas, including:

  • Valuation
  • Liquidity
  • Custody
  • Arbitrage
  • Potential manipulation and other risks.

The SEC staff indicated that at this time it has “significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the 1940 Act and its rules”.

A copy of the letter is available on this link. https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm

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