It’s the last thing that the cryptocurrency complex needed: a high-profile case involving junk ICOs, or initial coin offerings. This time, the mainstream media blasted a spotlight on outspoken boxing legend Floyd Mayweather Jr. and music producer DJ Khaled. Their crime? Promoting junk ICOs without disclosing their compensation structure.
At the center of the controversy was Centra Tech. The ICO-issuer, along with two other blockchain-related firms, paid Mayweather $300,000 to promote various junk ICOs. The same company paid DJ Khaled $50,000 to likewise share the “opportunity” with his social-media fanbase.
Both dutifully obliged, especially the boxer. Mayweather pumped his target junk ICOs like a veteran boiler-room con artist, bragging about his future riches from the speculation. He also gave himself a new nickname: Floyd Crypto Mayweather. For his part, Khaled described the Centra ICO as a “gamechanger.”
Aside from the ethical concerns of pump-and-dump schemes, Mayweather and DJ Khaled committed a major no-no: they failed to disclose that Centra Tech and other parties paid them for their endorsements.
Naturally, the feds came sniffing around. However, it was in the form of the Securities and Exchange Commission, not the Justice Department. The SEC alleged that Mayweather and DJ Khaled appeared to promote unbiased opinions due to their compensation non-disclosure. But because they were paid promoters, their opinions were in fact commercial endorsements.
Subsequently, both parties settled with the SEC. Along with paying a fine, they agreed not to promote securities of any kind for a specified time period.
I have no issue with Mayweather and DJ Khaled facing stiff penalties for what they did. My concern rests solely with the enforcement agency.
The SEC Overstepped Its Boundaries Adjudicating Junk ICOs
The SEC has zero legal authority to adjudicating junk ICOs: zip, zilch, nada. By its own name, they are the Securities and Exchange Commission. Junk ICOs are neither securities, nor do they represent exchanges.
Granted, I understand this matter’s gray area. Junk ICOs certainly act like securities, which is similar to the traditional initial public offering (IPO). But similarity alone doesn’t confirm or establish identity.
More ambiguity stems from the security’s definition. In its loosest sense, a security is a tradable financial asset. But what separates actual securities from say baseball cards are clear, mandated guidelines.
As of yet, no government agency has defined cryptocurrencies. Do they in fact represent securities, or are they digitalized currencies? Both crypto critics and proponents can make arguments on both sides of the equation. But the underlining fact is that the U.S. has not officially determined what a cryptocurrency is.
With that in mind, how can the SEC hand down penalties on businesses beyond their jurisdiction? Note that the SEC has stated that cryptocurrencies “may be” considered securities, not that they are. In this case, their powers are ambiguous but their enforcement is not.
I find this situation completely outrageous. It’s no different than a cop believing a crime occurred, and making an arrest solely on that opinion. Never mind facts or actual guidelines!
I’m afraid if we let the SEC overstep its boundaries like this, they will further crack down on cryptocurrencies arbitrarily.