U.S. Regulatory Updates Impacting Blockchain, Cryptocurrencies and ICOs
27 September 2017
On Monday, September 25, the United States Securities and Exchange Commission (the SEC), the U.S. regulator of the securities industry, announced two new initiatives that are likely to impact the blockchain and cryptocurrency industries.
The SEC’s initiatives involve the creation of a new ‘Cyber Unit’ which will work as part of the SEC’s Enforcement Division and the creation of a ‘Retail Strategy Task Force’ which will develop initiatives to identify misconduct that impacts retail investors. Both initiatives have the potential to affect the increasingly prevalent ‘initial coin offering’ or ‘ICO’ form of financing that has grown significantly since 2016. Most notably, the SEC’s press release specified that the Cyber Unit will focus in part on “violations involving distributed ledger technology and initial coin offerings”. The press release states that the Cyber Unit has “been in the planning stages for months” and the new unit follows on the SEC’s investigative report of July 25, 2017 which concluded that tokens relating to ‘the DAO’ (‘the Decentralized Autonomous Organization’), a decentralized crowdfunding platform built atop the Ethereum network in 2016, were unregistered securities under U.S. law.
In a separate enforcement action on September 21, 2017, the United States Commodity Futures Trading Commission (the CFTC), the U.S. regulator of the derivatives industry, charged operators of an alleged Ponzi scheme with fraud, misappropriation and issuing false account statements. The alleged Ponzi scheme solicited funds from investors for supposed placement in a pooled commodity fund that purported to use an algorithmic trading strategy. As alleged by the CFTC, the strategy and performance of the fund was fake, and payouts were made using misappropriated funds. While the enforcement action is unsurprising given the alleged fraudulent behavior, it is notable as the first use of the CFTC’s potential power to address misconduct in the underlying spot market of bitcoin (as distinguished from the derivatives market of such a commodity). Previously, in 2015 the CFTC determined that bitcoin and other virtual currencies are commodities, making them subject to the CFTC’s potential regulation. More recently, the CFTC has also established the LabCFTC initiative to engage more closely with the FinTech industry and recent statements by the CFTC indicate that it is considering blockchain-based options for certain market monitoring functions.
Whether the CFTC or SEC will have primary regulatory oversight over particular tokens or virtual currencies remains a facts-and-circumstances determination, but the recent announcements of both the SEC and the CFTC indicate that both federal regulators are taking notice of developments in the blockchain and cryptocurrency industry.
For more information on the above developments, please contact David Lucking, Justin Cooke or Conor O’Hanlon.