NEW YORK — The public’s interest in all things bitcoin and efforts by entrepreneurs to fund their businesses with digital currencies is starting to draw more attention from regulators.
The head of the Securities and Exchange Commission this week warned investors on the risks of investing in largely-unregulated digital currencies.
Just this month, the SEC halted two attempts to raise money through what’s known as an initial coin offering. Legal experts believe this signals that a crackdown on sketchy offerings is coming.
“The SEC has given so many warnings now that people should know they are on notice,” said Joshua Klayman, a lawyer with the firm Morrison & Foerster who specializes in legal issues related to digital currencies.
The world of bitcoin and digital currencies can be split into large branches. There are investors who buy the currencies like bitcoin and ethereum. Related but separate from the currencies is an event known as an initial coin offering, or ICO, which allow startups to use the technology behind bitcoin, known as blockchain, to fund projects.
With an ICO, a startup will issue a currency, or sometimes called a token, that can be used to buy services with the company. For example, a startup offering online storage could have tokens that can be used to buy storage.
ICOs have soared in interest this year. CoinSchedule, which tracks the ICO market, says 234 ICOs this year have raised $3.7 billion for startups. In 2016, 46 ICOs raised less than $100 million.
How these tokens are marketed has become a central question for the SEC. Companies issuing tokens that are usable on their own platform right now aren’t a concern, but when the company’s marketing implies that these tokens can appreciate in value, that becomes a red flag.
“We have gotten to a point a few times where some of these tokens start looking an awful lot like securities,” said Clyde Tinnen, a partner at Withers Bergman.
Investors in ICOs are oftentimes early investors in bitcoin or other digital currencies who, with the rapid rise in price, have become multimillionaires on paper and are now looking for the next hot idea. But some of the ICOs that have been funded are just that — an idea on paper. They might even use language copied and pasted from other ICOs to sell their startup to investors. Others have paid celebrities, like boxing legend Floyd Mayweather and socialite Paris Hilton, to endorse their ICOs. All this has raised concerns about the potential success of…