cryptocurrency, bitcoin, ethereum, crypto
Today the Securities and Exchange Commission got a federal court order halting the altcoin ICO of AriseBank.
The ICO raised around $600 million in two months and planned to create the world’s first “decentralized bank” via a cryptocurrency, AriseCoin. AriseBank claimed it would offer consumer-facing products and services, including a cryptocurrency trading algorithm.
The crux of the order is that AriseCoin, in the SEC’s view, is a security and needs to either be registered or fit into an exemption.
Fraud Red Flags
There is the standard Howey framework for analyzing whether something is a security. However, in a lot of cases, the key isn’t so much whether an investment cleanly fits into the Howey framework.
Rather, when the SEC goes after something as a security, it’s usually because there were brazen red flags of fraud and manipulation.
For example, when the SEC sent a cease and desist to Munchee, Munchee advertised its tokens beyond its target users, which suggests they were selling them to buyers who had no intention of using the tokens for their utilitarian purposes.
Moreover, Munchee directly advertised that it would use ICO proceeds to increase the value of its tokens. If proceeds are put to pure utilitarian purposes, then the focus shouldn’t be increasing monetary worth, but improving the utility (with any appreciation in value as a secondary effect).
AriseBank’s Red Flags
AriseBank falsely claimed that it offered FDIC-insured accounts and failed to disclose that key executives had criminal backgrounds.
AriseBank also directly took shots at the SEC with, for example, a Facebook post stating “Rather than close our ICOs and shiver in fear, companies like AriseBank have geared up for the coming fight with the SEC.”
These are the kinds of red flags that justify intervention.
First Order of Its Kind
This court order is the first instance of a court freezing the assets and appointing a receiver over them. This measure prevents a person or group from making the assets disappear (see, e.g., Prodeum) before the court can fully hear the matter.
This order is likely what 2018 has in store for ICOs. While the SEC probably doesn’t have the resources to examine and go after every ICO that could be a security, it’s likely to focus on the blatantly fraudulent ones.
And this is something to be applauded; you should want the Bitconnect’s flushed out since their mere existence undermines the legitimacy of the crypto industry.