The Great Crypto Crash of 2018 looks more and more like one for the record books.
As virtual currencies plumbed new depths on Wednesday, the MVIS CryptoCompare Digital Assets 10 Index extended its collapse from a January high to 80 per cent. The tumble has now surpassed the Nasdaq Composite Index’s 78 per cent peak-to-trough decline after the dot-com bubble burst in 2000.
Like their predecessors during the Internet stock boom almost two decades ago, cryptocurrency investors who bet big on a seemingly revolutionary technology are suffering a painful reality check.
The virtual-currency mania of 2017 - fuelled by hopes that Bitcoin would become “digital gold” and that blockchain-powered tokens would reshape industries from finance to food - has quickly given way to concerns about excessive hype, security flaws, market manipulation, tighter regulation and slower than anticipated adoption by Wall Street.
Crypto bulls dismiss negative comparisons to the dot-com era by pointing to the Nasdaq’s recovery to fresh highs 15 years later, and to the internet’s huge impact on society. They also note that Bitcoin has rebounded from past crashes of similar magnitude.
But even if the optimists prove right and cryptocurrencies eventually transform the world, this year’s sell-off has underscored that progress is unlikely to be smooth.
Indeed, increased scrutiny is starting to bite. US regulators brought two first-of-their-kind enforcement cases tied to cryptocurrencies Tuesday, fining a firm that promoted itself as a Walmart for initial coin offerings and a hedge fund that offered digital assets without meeting registration requirements.
TokenLot and its owners agreed to pay more than $500,000 to settle Securities and Exchange Commission claims that they failed to register as broker-dealers, the agency said on Tuesday. The self-styled “ICO Superstore” and owners Lenny Kugel and Eli L Lewitt received more than 6,000 investor orders and handled more than 200 digital tokens without proper licences from July 2017 through February, the SEC said. They agreed to resolve the allegations without admitting or denying wrongdoing.
In the second case, Crypto Asset Management was accused of marketing what it falsely claimed was the “first regulated crypto asset fund in the United States,” the SEC said separately. The failure to register caused the fund, which raised more than $3.6 million over a four-month period starting in late 2017, to be operating illegally, the agency said. The sole principal, Timothy Enneking, agreed to pay a penalty of $200,000 without admitting or denying the regulator’s findings.
“US securities laws protect investors by subjecting broker-dealers and other gatekeepers to SEC oversight, including those offering ICOs and secondary trading in digital tokens,” said Stephanie Avakian, co-head of the agency’s enforcement division.
An attorney for TokenLot declined to comment. An attorney for Crypto Asset Management didn’t immediately respond to a request for comment.
The cases brought Tuesday by the SEC are likely to be followed by others related to cryptocurrencies. An enforcement official told Congress in May that the agency has “dozens of investigations that are ongoing” focused on digital currencies.
The SEC has repeatedly cautioned that ICOs in particular are susceptible to fraud. Despite the warnings, token sales have raised billions. The agency has said it considers the vast majority of those offerings to be securities, which requires registration to comply with federal law.
Separately, in a ruling that was a win for the government, a federal judge on Tuesday allowed a criminal case to proceed to trial, concluding that jurors could find that the particular initial coin offering violated securities laws.
In the offerings, a company sells digital tokens that can eventually be redeemed for goods and services. The coins can be traded in secondary markets - which the SEC says make them securities and subject to its oversight.