On October 4, 2017, the leader of the US Securities and Exchange Commission (SEC) testified before a session of the House Financial Services Committee. Following the committee’s recess, SEC Chairman Jay Clayton responded to an inquiry from Rep. Ed Perlmutter (D-CO) about token offerings (also called ICOs).
“It reminds me of the old days with penny stocks,” said Perlmutter. “You’re in a position where you [have to] balance formation and ease of liquidity with the potential for fraud and theft and loss.” Perlmutter asked Clayton to provide his “basic philosophy on this stuff” as chair of the SEC.
Off the bat, Clayton agreed with Perlmutter about the penny stock comparison. “Here we have a new thing that has some good, but it’s a new avenue for fraud.” With regard to token offerings, Clayton was somewhat guarded in his response.
“I’m cautiously optimistic about the enforcement division’s approach,” he said. “They know that this is a ripe area for pump and dump. Pump and dump – it’s actually easier here than [it] is in the penny stock area because it’s all electronic, it’s all anonymous, it’s harder to catch the bad guys at the end of the day.”
Clayton might have been oversimplifying here, but the general sentiment about pump and dumps is correct.
Clayton continued, “I recognize that and, from a philosophical and policy point of view, if we’re not doing a decent job on educating people … it’s going to be a lot harder for us to get the benefits of this kind of technological advancement [blockchain technology].”
The SEC recently disclosed that its EDGAR filing system was targeted in a 2016 hack and subsequently established a Cyber Unit that will help monitor token offerings. Just a few days later, the agency announced that it had filed charges against fraudulent ICOs that were allegedly backed by real estate and diamonds.