By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - A global regulatory crackdown on cryptocurrencies created by startups to finance new projects could slow the pace of virtual currency sales as questions mount about their transparency and the risk of scams for investors.
More than 500 digital technology startups around the world have raised funds by selling their own cryptocurrencies, or tokens, that sidestep banks or venture capital firms as intermediaries.
The huge investment in the largely unregulated market, which began in 2009 with the launch of bitcoin and includes more than 1,200 tokens, has turned the financial world on its heels, especially as a stunning bitcoin rally in 2017 attracted speculators and stoked concerns about a bubble.
Regulators around the world, led by the U.S. Securities and Exchange Commission, have responded with rules or guidelines that are giving investors pause and delaying new offerings.
Analysts welcomed the respite, saying the market had spiraled out of control.
"We believe that regulation in the ICO space will filter out some of the nonsense in the marketplace and is part of the overall maturing of the crypto asset class," said Sam Lee, director of research at ICO advisory firm Strategic Coin in New York.
The SEC has cracked down on companies that have fraudulently solicited funds from investors claiming to invest the cash in virtual currencies or ICOs and sent several subpoenas to companies that raised large amounts of cash.
Overstock.com (NASDAQ:OSTK) disclosed in a filing that the SEC was investigating its recent cryptocurrency offering.
Countries such as China and South Korea have banned ICOS.
"I am incredibly bullish on ICOs in the long term, but in the short term, this technology got ahead of itself and people got greedy," said Bart Stephens, co-founder and managing partner of venture capital firm Blockchain Capital in San Francisco, which has invested in cryptocurrencies and blockchain companies.
Blockhain, which underpins bitcoin and most cryptocurrencies, is a digital database with information that can be publicly shared within a large decentralized network.
Investors have become selective, Stephens said. Blockchain Capital gets 25 pitches on a variety of coin offerings per day but only 1 percent gets serious consideration, he noted.
"You don't give two kids out of Stanford $200 million up front with no strings attached. That's going to end poorly."
In 2017, startups raised $6.3 billion from ICOs, up from roughly more than $100 million in 2016, according to data from cryptocurrency research firm Smith + Crown.
In the first two months of the year, 133 projects were successfully funded, down from 212 in November and December when bitcoin (BTC=BTSP) hit an all-time high just below $20,000, the data showed.
Funds raised for January and February also slipped nearly 10 to $2.1 billion, compared with $2.3 billion raised in the last two months.
(GRAPHIC: Initial digital currency offerings - http://reut.rs/2FpcVJe)
DELAYS IN NEW OFFERINGS
Some companies are delaying offerings because of tightening regulations.
Grain Foundation has postponed its public token sale to later this month as the company seeks to fully comply with Swiss ICO rules, Chief Executive Onno Hektor said in a post on The Medium, an online publishing platform.
Grain aims to allow companies to process work agreements on the blockchain with an instant payment mechanism.
The Swiss Financial Market Supervisory Authority has sharpened compliance rules for ICOs and published more guidelines that complement rules laid out in April 2017, according to its website.
Investors have welcomed regulators' involvement.
Steven McClurg, chief investment officer at asset management firm Blockchain Momentum, said stricter enforcement would ultimately elevate digital assets and attract new investors who are awaiting regulatory guidance.
LONG-TERM VIEW
Investors and market participants have said government regulation would pave the way for high-level projects to get funded, possibly from major financial and corporate companies.
"The bar is going to be raised," said Matthew Roszak, co-founder and chairman of U.S. blockchain technology company Bloq in New York. "Quality is going to matter."
More high-quality ICOs should attract more institutional investors in the long run, analysts said.
"It's an upward roller-coaster," said Sean Walsh, founder of crypto-asset investment firm Redwood City Ventures in Denver, Colorado. "The long-term trend is still upward, but it's a volatile transformation of the world."