State and Federal Regulators Coordinate Efforts to Combat Crypto Fraud

This past week was a busy one for state securities regulators, the CFTC and the SEC as they continue their focus on rooting out fraud from the digital currency space and crypto- and blockchain-based ventures.  Noteworthy developments included (1) the North American Securities Administrators Association (NASAA) announcing a “cryptosweep” – a coordinated series of enforcement actions by state and provincial securities regulators in the U.S. and Canada to crack down on fraudulent Initial Coin Offerings (ICOs) and cryptocurrency-related investment products;[1] (2) SEC Chairman Clayton applauding these efforts by the states; (3) the SEC launching a fake “Howey Coins ICO” webpage to educate investors on the risks of purchasing ICO coins; (4) CFTC and NASAA signing an information sharing agreement; (5) CFTC Chairman Giancarlo speaking at the NASAA FinTech Forum in Washington, DC; and (6) CFTC guidance issued to CFTC-registered exchanges and clearinghouses with respect to listing digital currency derivative products like bitcoin futures.

A key takeaway from these developments is the heightened level of communication and coordination among the various regulators at all levels and jurisdictional reach (e.g., state, federal and international, both in terms of securities and commodities). The NASAA/CFTC information sharing agreement is a perfect example. NASAA President Joe Borg, Alabama’s chief securities regulator, noted the relevance of the agreement during NASAA’s FinTech conference in Washington, DC, given what he referred to as the recent epidemic of schemes involving cryptocurrencies and other modern types of commodities. CFTC Chairman Giancarlo was a speaker during the event and lauded the agreement for its ability to focus the CFTC’s and NASAA’s resources to pursue enforcement of relevant laws.  SEC Chairman Clayton joined in by publicly stating that this coordination should serve as a “strong warning to would-be fraudsters in this space that many sets of eyes are watching, and that regulators are coordinating on an international level to take strong actions to deter and stop fraud.”  Information sharing is an important tool used by regulators across all levels, not only generally, but specifically in relation to pursuing enforcement actions against wrongdoers.  Noted examples include investigative leads from the CFTC’s Office of the Whistleblower or other tips, complaints and referrals the CFTC offers to provide to NASAA members.

Not that there was any doubt by market participants and experts working in and around this space, but this flurry of activity signals the regulators’ unrelenting focus on all things crypto and blockchain, including financial products and ventures that these assets and technology have spawned. By communicating with each other and coordinating their efforts, it is clear that U.S. regulators are taking a holistic and systemic approach to combating fraud in the developing crypto and blockchain space, most notably with respect to ICOs.  More is sure to follow.

Goodwin has been at the vanguard of legal advisors in the FinTech space, especially cryptocurrency and blockchain company formation, fundraising transactions, industry regulation and enforcement action. More information is available here.

[1] NASAA is the non-profit association of state, provincial, and territorial securities regulators in the United States, Canada and Mexico. NASAA has 67 members, including the securities regulators in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. NASAA’s U.S. members are responsible for administering state securities laws, commonly known as “Blue Sky Laws.” For more information, visit: www.nasaa.org.

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