Why Colorado joined in national “Operation Cryptosweep” to suss out fraudulent cryptocurrency offerings
When Colorado regulators went after two out-of-state companies promoting their cryptocurrency offerings to residents earlier this month, it was part of the national “Operation Cryptosweep” that resulted in 70 investigations and 35 enforcement actions nationwide, investigators said Monday.
The state was among at least a dozen North American regions that stormed the cryptocurrency market in May to weed out fraud in the budding business of selling virtual coins, also known as initial coin offerings, or ICOs. Several companies in New Jersey, Alabama, New York and British Columbia received cease and desist letters, according to organizers North American Securities Administrators Association.
Colorado Securities Commissioner Gerald Rome said that he went after Linda Healthcare Corp. in Milpitas, Calif., and Broad Investments in Sammamish, Wash., because they violated state securities law by promoting the offering to Colorado residents but failed to disclose investment risks. They also did not have an operating website.
“We have more investigations going,” Rome said in an earlier interview. “We’ll continue to look at what’s happening in Colorado and doing the job that we’re supposed to do.”
Broad Investments’ site is no longer publicly available. Linda Healthcare now has a banner that says “Because this coin offering constitutes a security in Colorado we do not accept ETH (a cryptocurrency) from Colorado residents.”
According to ICO tracker CoinSchedule, there have been at least 310 ICOs this year that raised around $7.5 billion. Such offerings sell virtual coins to the public as a way to raise money to fund the business. At least, that’s the idea. Questionable results or misleading campaigns have caused regulators to crack down on offerings, such as the one by PlexCoin, which claimed a 1,354 percent profit in less than 29 days after its August offering.
Last week, the Securities and Exchange Commission ran a mock ICO called HoweyCoins. Click the “Buy Coins Now” button and you’re sent to an SEC investor information site informing you that you could have been scammed.
But not all coin offerings are fraudulent, nor should they be classified as a security, blockchain advocates say. While cryptocurrencies run on blockchain technology, the two are not the same. Blockchain is like a cloud-computing network in that runs on multiple machines. But it’s not controlled by a Google or Amazon. Rather, it operates on a decentralized network where independent computers vouch for the authenticity of the data, such as medical records or home ownership deeds.
Cryptocurrency, like bitcoin, is more like an app that runs on the blockchain. And some coins, called utility tokens, are not intended to have a cash equivalent, but are more like arcade tokens that are no good outside of Chuck E. Cheese’s.
“In the long run, I view the increased regulatory attention that cryptocurrencies and tokens are receiving as a positive sign that the space is maturing, but we have to go beyond investigating suspect deals,” said Frank Ricotta, who is developing a private blockchain that gives people ownership of their own medical records.
“As they gain more notoriety, it’s fair to say that negative news tends to grab the headlines. However, companies and investors alike believe that tokens not only provide more direct access to capital, they also provide a means to create new markets,” he said. “Yes, we must proceed with caution. Too much regulation kills innovation, and not enough creates a breeding ground for fraud.”