In ICOs, startups sell a percentage of newly issued cryptocurrency in exchange for legal tender or other cryptocurrencies.
The value of Bitcoin tumbled earlier this month after The People’s Bank of China declared initial coin offerings illegal. In its website, the central bank said a “large number” of fundraising activities for ICOs have given rise to speculation, and invite suspicion of illegal financial activities.
“A successful civil claim against a token issuer for fraud or securities violations may trigger a flurry of other similar suits, but each case will vary based on the details of the sale,” Andrew Hinkes, an attorney at Berger Singerman, told Bloomberg BNA.
As of 16 September, ICO have raised over US$2.2bn in all-time cumulative funding, according to figures from Coindesk.
ICOs will have to be extra meticulous in correctly classifying their tokens. Andrew Hinkes, a dispute resolution attorney at Berger Singerman, told Bloomberg BNA that evolving technologies behind the coins can make it difficult to determine if a token is a security, utility, or digital currency. Those who fail to do so could be failing to comply with either securities or money services business regulations.
According to Brian Knight, senior research fellow at the Mercatus Center at George Mason University, investors have the right of recession it the security was issued not in accordance with the law.
“The larger a market becomes, the more people are involved, the more money involved, the more likely you have litigation,” said Stephen Palley corporate and commercial litigation attorney at Anderson Kill, as quoted by Bloomberg BNA. “People lose money, then sue.”
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Virtual currencies like Bitcoin and Ethereum have reached record highs this year – but analysts say initial coin offerings (ICOs) face a wave of litigation ahead amidst greater government scrutiny and fraud risks.