SEC and CFTC Cryptocurrency Regulation Chronology and Outlook for the Rest of 2018


The over 80 subpoenas recently issued to companies in the cryptocurrency sector have provided a logical corollary to the agency’s many warnings about ICOs potential violations of security laws.

The time for warnings is over. Now, the SEC’s intentions have evolved into enforcement actions, forever changing the scenario for new cryptocurrency initiatives.

In late 2017, Bitcoin’s spectacular rise in value lured both would-be cryptocurrency developers and new investors with the promise of returns higher than 2,000 percent. Although the digital currency’s value eventually stabilized, these price fluctuations and the surge in ICO initiatives raised alarm among regulators, who pointed to issues of valuation, liquidity, and arbitrage.

One of the main concerns for CFTC and SEC regulators is the lack of transparency that is inherent to blockchain.

While the heads of both agencies have publicly expressed their optimism about the future of financial technology, they have clearly advised companies raising capital through ICOs to take “appropriate steps to ensure compliance with the federal securities laws.”

As per the U.S. Supreme Court’s Howey test to determine what constitutes a security, ICO activities fit the bill: they involve the investment of money with a reasonable expectation to obtain profits resulting from the entrepreneurial/managerial efforts of others. In other words, the sector’s semantic attempts to dodge SEC scrutiny have failed.

The recently issued SEC subpoenas demanded a variety of documents from cryptocurrency companies, from marketing materials, to establish if there has been false advertising, to investor information, and details about organizational structure.

Recent SEC and CFTC Enforcement Actions

  • April, 2018 – SEC complaint filed against Centra Tech, a company that used celebrity endorsements and fake CEO bios to lure investors. Their ICO involved a cryptocurrency-funded debit card supposedly backed by Visa and Mastercard. Three executives were arrested.
  • April, 2018 – Over $27 million in fintech trading proceeds were frozen after the SEC filed a complaint accusing Delaware-based Longfin of causing a surge in stock prices as a result of the sale of restricted shares and subsequent acquisition of a “purported cryptocurrency business” that had “no ascertainable value.”
  • January 2018 – Texas-based AriseBank received a court order halting an offering of its cryptocurrency AriseCoin. According to the SEC, the bank lied to investors when it said it was in the process of acquiring a federally insured bank. Endorsed by sports stars, the ICO was viewed by the SEC as an “outright scam;” one that managed to raise $600 million in barely two months.
  • January, 2018: The CFTC filed a complaint against Las Vegas-based My Big Coin Pay, a company that secured $6 million from investors in a virtual currency, through various misrepresentations, and used customer funds for the owners’ personal expenses.
  • January, 2018 – The CFTC accused Colorado-based Dillon Michael Dean and his UK-registered company, The Entrepreneurs Headquarters Limited, of engaging in a Ponzi scheme by securing Bitcoin investments, which were subsequently used to pay earlier investors in a commodity pool.
  • January, 2018: Patrick K. McDonnell and his New York-based company CabbageTech were charged with “fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.” The CFTC alleges that the defendants “used their fraudulent solicitations to obtain and then simply misappropriate customer funds.”
  • December 2017 – $15 million ICO launched by Munchee Inc. halted by the SEC. The California-based restaurant review company was told it should have registered its endeavor as a securities offering.

2018 Outlook

Since the issuing of the subpoenas and the creation of the SEC’s Cyber Unit, it has become clear that the agency will continue to scrutinize the sale, exchange, and marketing of digital currencies during the rest of the year and beyond.

Regulatory efforts will likely expand, as the SEC appears to be preparing to crack down on a large number of cryptocurrency-focused private fund managers. Disclosures about risk and potential conflicts of interest are likely to become the main targets of the agency’s scrutiny.

Ensuring compliance with federal securities laws is going to be one of the keys to ICO survival. Cryptocurrency entrepreneurs should also keep track of state legislation, as it has been known to define digital tokens in a way that may impact their categorization as securities.

This was recently the case in Wyoming, where “utility tokens” are not deemed to be securities, and Massachusetts, a state that is aggressively enforcing the notion that they are.

On the other hand, the creation of the cross-agency “Distributed Ledger Technology (DLT) Working Group,” which includes the SEC, the CFTC, U.S. Attorney’s Offices, and the Treasury points to continued coordinated efforts to increase and improve regulatory efforts targeting ICOs and other cryptocurrency initiatives.

In the words of a former SEC Commissioner, “there is going to be a ton of enforcement activity.”

If you are facing SEC or CFTC enforcement activity on cryptocurrency or ICO issues, we can help. At Herskovits PLLC we focus exclusively on regulatory defense with specific attention to ICO and cryptocurrency charges. Call early in the process and we might be able to head off an intrusive investigation. 212.897.5410 OR CONNECT ONLINE

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