Navigating the Crypto Industry's Obstacles And Pitfalls
As cryptocurrencies have grown in acceptance and popularity, so has the attention of governmental agencies, which seek to reign in the largely unregulated industry and bring it under their control
Since cryptocurrencies first burst on the scene in 2009 when an unknown person or group released the Bitcoin token into the world under the name Satoshi Nakamoto, the burgeoning blockchain industry has been attracting some of the most innovative minds in the IT sphere. After the crypto craze reached its peak in 2018, wiping out many of the more speculative and even fraudulent ventures, the more serious projects got down to the hard work of developing decentralized distributed ledger technology for practical application. Though it’s usually only associated with cryptocurrencies, today, companies can use blockchain technology to track inventory and establish their own internal networks, individuals can use P2P technology to create local internets, and developers are creating new types of decentralized applications, or Dapps, which can be run directly on blockchains.
However, there is reason for new startups in the crypto field to be wary. As cryptocurrencies have grown in acceptance and popularity, so has the attention of governmental agencies, which seek to reign in the largely unregulated industry and bring it under their control. This can create problems for bright young programmers and entrepreneurs intent on exploiting and developing this largely uncharted IT territory. As regulators still haven’t decided exactly what to make of this novel and rapidly evolving technology, the approaches they take to regulation have been extremely uneven around the globe. Because of this, blockchain pioneers face a regulatory landscape replete with hurdles and pitfalls.
So, how can a startup trying to develop a brilliant new idea navigate the legal terrain without putting their project at risk? Here are a couple of hazards to be wary off.
Legal status and regulation
The situation in the US provides a good illustration of how vague regulatory policies with respect to crypto assets can lead projects into dangerous territory.
Under US law, securities must be registered with the country’s Securities and Exchange Commission (SEC). However, commodities and property, including digital property, are excluded unless they entail ownership in a company or are an interest-producing investment asset. It is the legal opinion of most lawyers that crypto assets that do not represent an ownership stake in a business and are not income or interest-bearing should not be considered securities and, therefore, do not require SEC registration.
That being said, several high-profile projects have still been shut down or heavily fined by the SEC for failing to register. Telegram founder Pavel Durov received the wrath of the regulatory agency when trying to launch a new blockchain-based decentralized network. TON was to be an alternative to payment processing services like those found in Google Play and the App Store, which might have eventually been able to supplant Visa and MasterCard as payment methods. The development team planned to finance the project through a private sale of a crypto token called Gram to accredited investors. As the token would become functional in the network’s ecosystem once it was launched, the developers did not consider Gram to be an investment vehicle. However, the SEC disagreed, arguing that initial Gram purchasers would be serving as underwriters, which would render the token an unregistered security. As a result, the TON project was abandoned before it even launched.
Crime and Extortion
While it may be clear that crypto innovators may need to be wary of regulatory agencies, a less apparent risk that blockchain companies run is that of crime and extortion.
The stories of billions of dollars being made virtually overnight, which were widely circulating just before the crypto bubble burst in 2018, attracted an array of hustlers and opportunists who attempted to tap into this huge torrent of cash by nefarious means. Skycoin, a Singapore-based tech company that develops blockchain and telecommunications hardware and software, is an example of a project that fell victim to such con artists.
In fact, the company continues to suffer from the effects of their illegal activities to this day and has recently filed a lawsuit for 2.6 billion in damages (Skycoin v. Stephens, 22-cv-00708) against multiple defendants, including former contractors and two journalists. The former contractors are being sued for carrying out a fraudulent invoice scam and their involvement in kidnapping Skycoin co-founder Brandon Smietana and his girlfriend in order to steal crypto assets.
The two journalists are being sued for receiving money to publish false and defamatory statements against the company as part of an extortion racket. These include Morgen Peck, a freelance journalist writing for The New Yorker that the lawsuit alleges received bribes from the defendants, including Bradford Stephens, who she knew had been flagged by the FCC for violations connected with one of his previous companies.
Given the enormous potential and sums of money involved in the crypto industry, one thing is certain: neither the regulators nor scammers are going away. While clearer and more consistent global legislation would help smooth out the regulatory lay of the land and allow entrepreneurs to venture into this promising sphere with greater confidence, new blockchain startups will still need to be wary of fraudsters and grifters behind their backs.Note: Investment in cryptocurrency and crypto assets is subject to financial risk and readers should do their own due diligence. Entrepreneur Media does not endorse any such investment.