As stated by the SEC, the cryptocurrencies purport to be items of inherent value, designed to enable purchases, sales and other financial transactions. They are intended to provide many of the same functions as long-established currencies such as the U.S. dollar, but they do not have the backing of a government or other body.
Proponents of cryptocurrencies highlight various potential benefits and features of them, such as (1) the ability to make transfers without an intermediary and without geographic limitation, (2) finality of settlement, (3) lower transaction costs compared to other forms of payment, (4) the ability to publicly verify transactions, (5) personal anonymity, and (6) absence of government regulation. Critics of cryptocurrencies note that some of these features may facilitate illicit trading.
On the other hand, ICOs give individual investors the opportunity to exchange currency such as U.S. dollars or cryptocurrencies in return for a digital asset labeled as a coin or token. These offerings can take many different forms, and the rights and interests a coin is purported to provide the holder can vary widely. For example, not all coins or tokens are securities. Whether or not they are securities would be determined by the facts of the specific case in hand.
With the growing market, investors and participants are presented with many questions. Some of those questions revolve around the legality of the market and the product. Also, some inquiries pose the risk of theft and loss (hacking, for example). To answer the questions one must consider all of the factors involved. Depending on the case, the answer may differ.
The main concern some investors have posed about cryptocurrency and ICO markets is the substantially less investor protection than some traditional securities markets. To date, no initial coin offerings have been registered with the SEC. Nor have the SEC approved for listing and trading any exchange-traded products holding cryptocurrencies or other related assets.
Another consideration for Main Street Investors is that these markets span national borders. Because of this, the risk of losing investments is amplified. This also makes it harder to pursue bad actors or recover funds. In order to reduce the risks of investing in these markets one should ask specific questions and demand clear answers.
On the other hand, Market Professionals should keep in mind a whole other range of considerations. For example, they must remember that any activity that involves an offering of securities must be accompanied by important disclosures, processes and other investor protections that the U.S. securities law require. In other words, when a security is being offered to the U.S. residents, the U.S. securities laws must be followed.
In conclusion, Market Participants must be wary when offering or selling coins without first determining whether the securities laws apply to those actions. Generally, selling securities requires a license, and experience shows that excessive touting in thinly traded and volatile markets can be an indicator of “scalping,” “pump and dump” and other manipulations and frauds, which are all illegal activities.