FINRA Lawyer Blog
In a commentary that appeared in the Wall Street Journal, Jay Clayton, chairman of the Securities and Exchange Commission, and J. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission, referred to the new regulation scenario for cryptocurrency trading.
In fact, they expanded the concept to ”distributed ledger technology (DLT)” defined as “an array of new financial products, including cryptocurrencies and digital payment services.”
Emphasizing the potential of DLT as the “next great driver of economic efficiency,” the regulators made it clear that the SEC and the CFTC will focus on enforcing rules and ensuring market integrity to protect retail investors looking to invest in cryptocurrencies and initial coin offerings (ICOs).
While this market has offered many investors spectacular yields, it also involves great risks.
The authors of the article compared the boom of cryptocurrency trading to the 1990s dot.com boom, when a small portion of companies survived and only a few investors saw the spectacular returns everyone expected.
While neither the SEC nor the CFTC wish to hinder innovation, the regulators clarified that “transparency, investor protection and market integrity are critical to ensuring that innovation continues.” They expressed concern about “substantial DLT-related market activity that shows little or no regard to our proven regulatory approach.”
As cryptocurrencies reach a market capitalization of $700 billion, the regulatory entities are looking at offshore trading platforms, which are not registered with them, and thus free from scrutiny.
Cryptocurrencies vs Traditional currencies
As opposed to traditional currencies, cryptocurrencies have:
- No governance standards
- No oversight
- No sovereign backing
- No reliable trading reporting
Today, most investors purchase cryptocurrencies as an investment, rather than as a medium of exchange. Regulators advocate policy efforts to oversee the market as with any other financial instrument.
Platforms dedicated to trading cryptocurrencies are registered as payment services, thus, they are currently outside the CFTC´s and SEC´s range of action, but judging from the commentary by regulators, that may be about to change.
Today, some anti-money-laundering obligations do apply to cryptocurrency trading. But there is little federal oversight. A few recent examples illustrate how that may be beginning to change. Not too long ago, two large exchanges worked closely with the CFTC for listing Bitcoin products. Although this was not a requirement under current regulations, the companies “agreed to implement risk-mitigation and oversight measures,” giving significant access to the CFTC, which gained crucial oversight over the market.
On the other hand, the SEC has identified certain cryptocurrency products which are, in fact, securities. “The offer, sale and trading of such products must be carried out in compliance with securities law,” regulators stated, “The SEC will vigorously pursue those who seek to evade the registration, disclosure and antifraud requirements of our securities laws.”
When it comes to the ICO market, the SEC understands that it does have full oversight, and it has repeatedly made it clear.
In this respect, the SEC´s representative clarified that it doesn´t matter whether these securities are called “coins” rather than, for example, “bonds.” “We are disturbed by many examples of form being elevated over substance,” Clayton added.
As the CFTC and SEC promise to strive for transparency and integrity in these innovative markets, it is clear that prosecution of fraud will immediately follow. Individuals and entities who have gotten used to trading in the former no-man´s-land of Bitcoin and other cryptocurrencies should brace themselves, because things are clearly about to change, and regulators will go as far as Congress to make sure it happens fast.
Are you, or might you become, a target for SEC or CFTC regulators regarding cryptocurrencies? We can help. Call securities lawyer Rob Herskovits and learn your options. Nationwide practice – more than two decades’ experience. 212.897.5410 or CONTACT ONLINE