On Monday, the Securities and Exchange Commission (SEC) announced it had obtained a court order suspending AriseBank’s (Arise) initial coin offering (ICO) whose public sale began in late December. According to the SEC, Arise targeted retail investors to fund what it claimed to be the world’s first “decentralized bank.” The Commission alleged that Arise and its principals “sought to raise hundreds of millions from investors by misrepresenting the company as a first-of-its-kind decentralized bank offering its own cryptocurrency to be used for a broad range of customer products and services.” To create this product, the SEC states Arise “falsely stated that it purchased an FDIC-insured bank which enabled it to offer customers FDIC-insured accounts” and would also offer customers “the ability to obtain an Arise branded VISA card to spend any of the 700-plus cryptocurrencies.”
The Director of the SEC’s Fort Worth Regional Office took the opportunity to assert that the SEC is closely monitoring the ICO markets and will take action when necessary when he stated, “attempting to conceal what we allege to be fraudulent securities offerings under the veneer of technological terms like ‘ICO’ or ‘cryptocurrency’ will not escape the Commission’s oversight or its efforts to protect investors.” The SEC’s actions included the appointment of a receiver (which was the first time the SEC has done so in connection with an alleged ICO fraud scheme) and an emergency asset freeze against Arise and its principals (including all digital assets held which included Bitcoin, Litecoin, Bitshares, Dogecoin, and BitUSD).
Aries’s troubles began earlier this month when the Texas Department of Banking Commissioner issued a cease and desist order against Arise. Within their cease and desist order, the Texas Commissioner stated that Arise violated Texas Finance Code Chapter 31 by using the term “bank” in its name and marketing materials to imply that it is in the business of banking in the State of Texas. Arise has become just the latest example that both US state and federal regulators of the financial services industry are closely monitoring the ICO and cryptocurrency markets and will continue to exercise and expand their supervision and enforcement powers within the space as they see fit. The early days of ICOs being loosely- or non-regulated proved short-lived. As seen over the last six months, any ICO should expect increased scrutiny. ICO issuers should expect to fully comply with underlying regulations governing the “purpose” of the coin (currency alternatives, securities, or quasi-financial transaction accounts).
