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Colorado regulators look beyond coin offerings for other cryptocurrency fraud

Chris Myklebust, the incoming commissioner, vows to keep an eye on evolving digital world where bitcoin value has dropped 80 percent

Gerald "Jerry" Rome was appointed Colorado Securities Commissioner in June 2014. He is retiring on Nov. 30, 2018. (Tamara Chuang, The Colorado Sun)
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A special task force to investigate cryptocurrency shenanigans will continue after Gerald Rome leaves his post Friday as commissioner for the Colorado Division of Securities.

The task force, created over the summer, has four staff members investigating potentially fraudulent activity involving cryptocurrency offerings. It has since expanded its scope to include other crypto investments.

“Once you devote staff time to it, you start learning a lot,” said Rome, whose office has since May ordered 18 cryptocurrency offerings to cease and desist, with two more expected. “We’re expanding our approach a little bit. We’ve identified some hedge funds in Colorado that are investing in cryptocurrencies.”

Rome’s replacement, Chris Myklebust, the state’s former Bank and Financial Services Commissioner, starts Monday. Myklebust said there still is work to be done to protect consumers against suspicious investments in the guise of initial coin offerings, or ICOs.

Chris Myklebust. (Handout)

“Commissioner Rome and I have had the opportunity to review and discuss the ICO Task Force and its mission at length, and I’m confident that, for the time being, the work being done is important and necessary,” Myklebust said. “That being said, the cryptocurrency space is constantly evolving and changing, and as such, I intend to keep the division’s approach to it flexible and to do the work of protecting Colorado investors where it’s needed most.”

Cryptocurrency is still a largely unregulated technology, although the U.S. Securities and Exchange Commission has issued several enforcement actions against companies that violate federal securities laws.

The lack of clarity over whether a coin is a security or a utility, like a video-game token, frustrates many in the local blockchain community. As in any new industry, there are bad guys, but there are also a lot of good startups trying to figure out the right approach, said John Paller, co-founder of ETHDenver, an event for the Ethereum blockchain community.

“No one is stopping us from going to the corner store and investing in the Powerball when it’s at $400 million. I can drop thousands of dollars. Why can I do that but not invest in the startup I’m choosing to support,” Paller said. “It’s finding the balance. Regulators should take very seriously this innovation that is nigh upon us.”

Yev Muchnik, a corporate and securities attorney at Launch Legal in Denver, said she has worked with members of the Department of Regulatory Agencies. She understands a regulator’s job but called the system “somewhat archaic.”

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“While fulfilling their much-needed role of protectionism within the confines of the law, there is a snowball of technological innovation challenging how we raise capital, authenticate information and transact, which naturally doesn’t fit so squarely into our round hole of regulations,” Muchnik said in an email.

Her advice to incoming Myklebust? Find the balance that doesn’t stifle growth or spur an exodus of entrepreneurs out of Colorado or the United States.

Do this, she said, by “taking (the) pulse of the Colorado market by exploring ideas and business ventures and sitting down with entrepreneurs to understand how they are using blockchain technology to make significant advances in our day-to-day lives.”

In an interview Tuesday, Rome said he created the task force after legislation was introduced by the blockchain community earlier this year to clarify what makes a token a security or a utility. His staff wasn’t consulted about changing securities law, and he opposed it. The proposed law fell short by one vote.

The task force initially targeted coin investments open to Coloradans, although they didn’t specifically target Coloradans, he said. Some ICOs won’t sell to consumers in the U.S. because of concerns from federal regulators. For the most part, the task force only looked at offerings online and did not interact with promoters until the cease-and-desist letter was sent.

“You’d look at their white paper online and see they were promising a 2 percent profit daily, and we know that isn’t happening,” Rome said. “With the help of the internet, we found some of these sites were lifting images from other companies, indicating they were fraudulent.” Some even spoofed the HoweyCoins website, a fake site set up by the SEC, Rome said.

Rome said his agency began paying attention to the cryptocurrency industry after bitcoin, the most popular coin, rose to a spectacular high value of $20,000 in December. Bitcoin’s value has since dropped 80 percent, trading Tuesday at around $3,800, according to cryptocurrency exchange site Coinbase.

“To have the excitement with how high it went, along with true believers, is just a recipe for people to lose significant amounts of money if they are not careful,” Rome said. “Part of what we did was to send out warnings to investors. We’re out in the space, and we’re finding almost all of it is fraudulent, so be careful. And I think Chris (Myklebust) agrees with this: Our mission is investor protection. We’re not out just to get the bad guys.”

The task force’s investigations have expanded into hedge funds that are investing in questionable crypto-related companies. If the funds are not disclosing the risks to investors, then they too are sidestepping the law.

But Rome, who is retiring, won’t be part of any changes to Colorado laws regarding securities. He leaves that to Myklebust, who will continue to work with the Colorado Blockchain Council, a group created by Gov. John Hickenlooper to figure out how to regulate the blockchain community while allowing it to thrive.

“Chris knows we’ve made it a priority with our office,” Rome said. “The blockchain council has subgroups, and we’ve assigned staff to … the securities law subgroup. That would deal with the issue of utility tokens, which was a big issue for the legislature. Doing it through the council like this is evolving it in the right way because you have a more balanced approach. That product will likely end up in a bill at the statehouse.”


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