Digital Currency Perspectives
January 5, 2018

New Year Brings Flurry of Regulatory Statements and Warnings Directed at Cryptocurrencies and ICOs

On the same day that a meteorological blizzard slammed the Eastern Seaboard, U.S. financial regulators unleashed their own flurry of statements and warnings surrounding initial coin offerings (ICOs) and cryptocurrencies.  Bundle up, because if the first week of the year is a prelude of things to come, then 2018 is sure to be a busy year in terms of regulatory focus on this space.

First up was the North American Securities Administrators Association (NASAA), which issued an alert reminding Main Street investors to proceed with caution when it comes to cryptocurrencies, ICOs and other crypto-related investment products.  NASAA is an association of securities regulators that includes the U.S. states, District of Columbia, Puerto Rico, the U.S. Virgin Islands, and provinces and territories in Canada and Mexico.  The alert warns investors on many fronts, including relying on headlines or hype as the basis of investments, the high risk and volatility associated with these products, minimal regulatory oversight of cryptocurrencies, cybersecurity risks (i.e., breaches or hacks) and potential lack of recourse if the cryptocurrency disappears.  The alert also identifies various red flags NASAA thinks investors should have on their radars, including guaranteed high investment returns, unsolicited offers, offers that sound too good to be true, pressure to buy immediately and unlicensed sellers.  For visual and audio learners, NASAA even prepared a short video describing ICOs and digital currencies.  The alert follows on the heels of NASAA identifying ICOs and cryptocurrency-related investment products as emerging investor threats for 2018.

The NASAA alert comes as no surprise given the regulatory action that closed out 2017, including the Munchee cease and desist order issued by the Securities and Exchange Commission (SEC), SEC warnings surrounding celebrity-promoted ICOs and statements from SEC Chairman Clayton regarding cryptocurrencies and ICOs.  Speaking of the SEC, following the NASAA alert, the SEC Chairman and Commissioners issued a statement commending NASAA for its action and highlighting the related investor bulletins, alerts, reports and statements the SEC has issued.  The SEC statement also notes that the NASAA release “recognizes that cryptocurrencies, while touted as replacements for traditional currencies, lack many important characteristics of traditional currencies, including sovereign backing and responsibility, and now are being promoted more as investment opportunities than efficient mediums for exchange.”

Finally, the Chairman of the Commodity Futures Trading Commission (CFTC) issued a statement on virtual currencies and the CFTC itself released a “backgrounder” on the CFTC’s oversight of and approach to virtual currency futures markets.  In his statement, CFTC Chairman Giancarlo reflects on the 2014 declaration to Congress by then-Chairman Massad that virtual currencies are “commodities” and subject to the CFTC’s oversight while also noting the recent enforcement action taken and regulatory guidance provided by the CFTC.  The statement also highlights several risks the CFTC considers associated with virtual currencies, noting that virtual currencies should not be ignored and that the CFTC believes it has an important role to play in this regard.  According to Chairman Giancarlo, “[t]he responsible regulatory response to virtual currencies is consumer education, asserting CFTC authority, surveilling trading in derivative and spot markets, prosecuting fraud, abuse, manipulation and false solicitation and active coordination with fellow regulators. The CFTC has been following this course of action and will continue to do so.”  The statement also notes an upcoming meeting of the CFTC’s Market Risk Advisory Committee, which will consider the process of self-certification of new products and operational rules, as well as the CFTC Technology Advisory Committee, which will consider the related challenges, opportunities, and market developments of virtual currencies.

Like the name implies, the CFTC “backgrounder” gives an overview of the current state play for federal and state oversight of virtual currencies, highlights the overarching themes of the CFTC’s regulatory response to virtual currencies, and dives a bit deeper into the self-certification process for new products (e.g., the Chicago Mercantile Exchange Inc. and the CBOE Futures Exchange bitcoin futures products and the Cantor Exchange bitcoin binary options).

Less than one week into 2018 and it is clear that the regulators intend to remain focused on this space.  We will be watching closely to see what comes next as the regulators will likely refine their views regarding cryptocurrencies and ICOs, provide additional industry guidance and commence additional enforcement activity.