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Operation Cryptosweep snags over 200 misbehaving ICOs

Posted: 30 August 2018 3:18 pm
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Some ICOs are deliberate scams, while others are accidentally on the wrong side of securities laws.

Operation Cryptosweep is one of the largest coordinated international efforts to crackdown on ICO scams. By the time it was publicly announced for the first time on 21 May 2018, it had already launches 70 inquiries and kicked off investigations on 35 of them.

Now just a few months later, those numbers are up to over 200 inquires commenced, with 46 regulatory actions taken.

The initiative is an effort of NASAA, the North American Securities Administrators Association, which is a coordinating body for state and provincial level securities regulators in Canada, Mexico and the US.

"State and provincial securities regulators are committing significant regulatory resources to protect investors from financial harm involving fraudulent ICOs and cryptocurrency-related investment products and also are raising awareness among industry participants of their regulatory responsibilities," said NASAA President and Alabama Securities Commission Director Joseph Borg.


Operation Cryptosweep isn't just for outright securities fraud such as exit scams, although there have been a few of those, Borg said. Rather, it's for any violations of state and provincial securities laws, such as a failure to properly register a product before it's offered to buyers.

"While not every ICO or cryptocurrency-related investment is a fraud, it is important for individuals and firms selling these products to be mindful that they are not doing so in a vacuum," Borg said. "State and provincial laws or regulations may apply, especially securities laws. Sponsors of these products should seek the advice of knowledgeable legal counsel to ensure they do not run afoul of the law. Furthermore, a strong culture of compliance should be in place before, not after, these products are marketed to investors."

Part of the issue, as SEC head Jay Clayton has previously noted, is that most ICOs and cryptocurrency projects hail from tech industries, rather than financial services. Essentially, it's often a case of a garage startup, or a lot of experienced programmers with little experience in financial services, making a genuine attempt at creating an honest product but forgetting or just not knowing how to legally tick every box.

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One of the key benefits of ICOs is that they let one move outside the more onerous requirements and let creators get on with the actual creating instead of spending a year jumping through hoops, so it's easy to see how someone might unintentionally fall afoul of the securities laws. Imagine if Satoshi Nakamoto had tried to get regulatory approval and venture capital for the creation of bitcoin. They probably wouldn't have gotten either, and bitcoin would never have been invented.

The advantage for traders might be that ICO registration and compliance with securities laws is a reliable way of separating the wheat from the chaff from the outright scams.

"Be cautious when dealing with promoters who claim their ICO offering is exempt from securities registration but do not ask about your income, net worth or level of investing sophistication," Borg said. "Do your homework and contact your state or provincial securities regulator with any concerns before parting with your hard-earned money – afterwards may be too late."

Periodic reports suggest that the vast majority of ICOs are scams, with the latest putting forward figures of about 80%. It might be interesting to see how those numbers change over time as Operation Cryptosweep and other clampdowns continue.

Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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