As for Johnson, representatives from Barclays Plc and Facebook Inc. said he never worked for them as it stated on his LinkedIn profile. As of Sept. 13, ExioCoin said on its webpage that it was withdrawing its ICO because it “is unlikely to meet the crowdfunding target” and that all buyers of the coin “will be eligible to have their contributions returned.”

Knight and Johnson didn’t return email messages seeking comment.

Pump And Dump

Some fraudsters are selling interests in the currencies through dormant companies. These corporate shells are often used in pump-and-dump schemes, the same fraud that made millions for Leonardo DiCaprio’s character in the film “Wolf of Wall Street.”

“It is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam,” the SEC said in its August statement.

That same month, the SEC suspended trading of three companies that failed to provide required regulatory filings. One of the companies, First Bitcoin Capital Corp., had a market value of more than $800 million on Aug. 14 before the SEC halted trading. The company sells a variety of digital currencies, including the President Trump coin and TeslaCoilCoin, which has no affiliation with the electric carmaker. 

“Clearly there’s going to be some government action in the ICO space,” said Kathryn Haun, a former federal prosecutor who handled cryptocurrency cases for the Department of Justice. “There are plenty of cases to choose from.” The SEC, Justice Department and the U.S. Treasury’s Financial Crimes Enforcement Network will all likely get involved, she said. “What we can expect to see is the opening of criminal investigations as well as SEC enforcement actions, maybe even in conjunction with each other.” ICO issuers also have to worry about potential class action lawsuits filed by token buyers who feel they’ve been defrauded, Haun said.

Two Categories

There are two categories of ICOs that government attorneys will likely focus on, Haun said. The first are cases of clear fraud where there was never any intention to build anything with the proceeds. The second is any unregistered ICO that raises a large amount of money after the SEC’s July pronouncement, because enforcement in such situations would have the largest deterrent effect, she said.

Haun is a fan of this new funding mechanism in many instances, but said that issuers still need to follow the law. The government will likely take time to bring actions, particularly in the second category, “because it will be a matter of first impression and the government doesn’t want to bring any case or action that isn’t rock solid or where there’s much gray area.” Haun, who is now a board member of the digital-currency exchange Coinbase Inc., was one of two assistant U.S. Attorneys who in January indicted a Russian national for allegedly laundering more than $4 billion using bitcoin.