SEC Regulation of Cryptocurrency

The unpredictable swings in cryptocurrency (“crypto”) prices this year have caught the attention of regulators and lawmakers. This blog sets out generally what cryptocurrency is, how it operates, and how it has been and may possibly be regulated in the future.

Unlike traditional (or fiat) currency, cryptocurrencies are not issued or backed by the U.S. government or any other government or central bank. Rather, Bitcoin and other cryptocurrencies are a form of digital currency used in electronic payment transactions. A cryptocurrency exchange, or digital currency exchange, is a business that allows customers to trade crypto or digital currencies for other assets, such as traditional fiat money or other digital currencies. There are zero or minimal transaction fees; transactions are fast and not bound by geography; and transactions are anonymous.

Crypto exchanges have no overarching regulation, as equity markets do. For example, Coinbase is registered in most states with a money transmitter license, but not as an exchange. The Office of the Comptroller of Currency has granted national trust charters to a handful of exchanges, but these patchwork frameworks are designed against money laundering and are not meant to prevent price manipulation.

The U.S. Securities and Exchange Commission (SEC) brought its first cryptocurrency-related enforcement action in July 2013 with SEC v. Shavers et al , charging the defendants with defrauding investors in a Ponzi scheme involving Bitcoin. Between that time and December 2020, the agency has brought a total of 75 enforcement actions, ordered 19 trading suspensions, and issued numerous statements and investor alerts.

Primary allegations included fraud, unregistered securities offerings, failure to register offerings of swaps to non-eligible contract participants, failure to disclose compensation when promoting a security, and failure to register as a broker or an exchange.

More recently, the soundness and stability of cryptocurrencies has gone from a fascination of early libertarian type adopters seeking to evade or defeat regulation to a substantial number of players seeking more regulatory clarity. One particular worry is the ability of vague tweets from a single person to send crypto prices gyrating. While the SEC has been involved in crypto for some time now, expect the agency to be more involved in the future.

The SEC is now chaired by Gary Gensler, a former investment banker who taught a class on blockchain at MIT. He made it clear at a fairly recent House committee hearing that the crypto industry could come under greater regulation concerning specifically price manipulation. With the knowledge and expertise, Gensler and his agency will play a major role in crypto’s future.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.