Why the SEC’s Scrutiny of Digital Assets Creates Opportunity for Financial Advisers

On October 11, 2019, the Securities and Exchange Commission announced it had filed an emergency action against two offshore entities for conducting an alleged unregistered and ongoing digital token offering in the U.S. and overseas that has raised more than $1.7 billion in investor funds.


The SEC’s action against Telegram Group Inc. and its wholly owned subsidiary TON Issuer Inc., was the 22nd cyber enforcement action taken against firms in the last 12 months. That’s the same number of enforcement actions the SEC had taken in the previous five years combined, an astonishing trend that presents an important message for financial advisors.

The statistics are not surprising. Since the first initial coin offering (ICO) was launched by Mastercoin in 2013, the number of ICOs issued every year has skyrocketed. From only three ICOs in 2015, the number rose to 902 in 2017. The market reached a peak in March 2018, with approximately 520 issuances.

Digital Assets: A Double-Edged Sword

While digital assets and the blockchain technology behind them present a new and efficient means for carrying out financial transactions, they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets. A lack of investor knowledge complicates the situation.

What investors don’t know can, indeed, hurt them. Many retail investors have been lured by intense media coverage of the performance and market capitalization growth rate of digital assets without having a clue of how they work and whether a specific investment opportunity is as phony as a $3 bill.

Despite the spike in alleged digital asset fraud, the era of cryptocurrency and coin offerings is here to stay. Many experts believe cryptocurrency soon will become an acceptable and perhaps even a preferred form of portfolio diversification for retail clients.

Similar to what happened when exchange-traded funds (ETFs) first entered the market, cryptocurrency creates opportunities for advisers who want to take the time and make the effort to gain knowledge and become a trusted financial counsel in this innovative space. ETFs were maligned by many when launched almost 30 years ago, yet have since become more popular than mutual funds in many ways.

A fiduciary obligation exists whenever a relationship with a client involves a special trust, confidence, and reliance on the fiduciary to exercise his or her discretion or expertise in acting for the client. With investments in digital assets on the rise, it’s only a matter of time before clients ask whether a specific crypto offering is a credible investment opportunity.

Now’s the time to take inventory of your knowledge and awareness of digital assets and how you and your firm may be better able to help serve clients. Core Compliance Legal Services can help. Contact us online or at (619) 278-0020.

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