The amount of initial coin offerings, or ICOs, has increased with the success of bitcoin and other cryptocurrencies over the past two years. A lack of a government regulatory structure has created a playing field ripe for scammers.

“Bitcoin and the New World of Programmable Money,” a panel at SXSW in Austin, featured Kathleen Breitman, co-founder of Tezos Blockchain; Michael Casey, senior adviser to the Massachusetts Institute of Technology Media Lab’s Digital Currency Initiative and managing partner at Agentic Group; Vinny Lingham, chief executive officer and co-founder of Civic; and Paul Vigna, a Wall Street Journal reporter who covers bitcoin, blockchain, and cryptocurrencies; discussed possible solutions to the current rules governing ICOs and cryptocurrencies.

Without guidance from the Securities Exchange Commission, the token community has been left to regulate itself and scammers have taken advantage of it.

Breitman described the community during its rise last year, “What was surprising to me about the whole ICO phenomenon early last year was actually about the self-policing that the communities were encouraged around. So in January 2017, it was easy to raise capital.”

The ease of raising capital led to scammers. Many people wanted to get into the bitcoin/cryptocurrency market so they would, sometimes, blindly invest in ICOs.

“Companies that are less reputable were suddenly coming out of the woodwork and actually they weren’t even companies, they were a couple of people who stuck together a website,” Vigna said. “You had a situation where people were just throwing together material to sell something to the public and they were selling it to raise money because this thing was so hot.”

Lingham said he was surprised how “gullible” investors were. He noted a token called PonziCoin, which actually described itself as a “the world’s first legitimate Ponzi scheme,” yet raised $250,000.

Lingham also said plagiarism of other ICOs’ business plans has led investors to blindly believe what they see on websites. He said investors need to do their research, as he has been included on a number of companies’ teams, but he has actually never even heard of the company.

He added that the current climate of the market is a “speculative bubble” where people are looking at the projected future profits of tokens, without taking into account that most of these ICOs will fail. Lingham said there will be “lots of failures in the next six to 12 to 18 months.” With these failures, Lingham believes the SEC will become involved, as people don’t complain to the SEC when they make money, they complain when they lose.

Indeed, the SEC has already issued a statement on cryptocurrencies and ICOs, which provided advice to “Main Street” investors and market investors whose actions impact Main Street investors. Some of the questions the SEC suggested investors ask are:

• “Is the product legal?”;
• “Are the trading markets fair?”; and
• “Are there substantial risks of theft or loss, including from hacking?”

Vigna said this was the SEC’s way of trying to figure out where to draw the line on ICOs.

Casey said he feared the shift in SEC policy might hurt the positive aspects tokens have to offer. “I think the SEC was making a much more open, constructive voice when they were saying ‘look we’re going to protect our financial system; we’re going to protect investors, that’s our role.’ I think that they’ve become more draconian.”

Casey was specifically referring to utility tokens, which represent future access to a company’s product or service, and do not act as investments. “I would love to see much more clarity from [the SEC] on where they stand on that issue, particularly so that there’s a roadmap for how these developers can move towards the most important thing.”

Lingham said the clarifying of regulations from the SEC was the ultimate issue. “Right now, we’re in a gray area and we don’t know where we stand as investors, or entrepreneurs… What we really want is clarity and when we get clarity then we can play by the rules, but right now people are stretching the rules to the extreme because of that lack of clarity.”

As to how the SEC can provide clarity, Lingham said the SEC could answer questions such as “What do you define as a security? What is a utility token? If people are going to raise money, how should they do it? What are the terms of engagement?”

Lingham said, “When we have that we can move forward, and until we have that, it’s a guessing game.”