Wall Street regulators stepping up enforcement actions against cryptocurrency investments

Mark Wilson/Getty Images

• Both the SEC and FINRA issued actions earlier this week
  against crypto firms.
• The enforcement actions were the first-ever major
  attempts to regulate the burgeoning industry.
• Lawyers say that as the nascent market for
  cryptocurrencies matures, it’s natural that regulatory bodies
  will start keeping closer tabs on it to protect investors from
  fraud. 

Two US financial regulators issued a string of actions earlier
this week against companies that have been involved with
cryptocurrencies, in the first major attempts to regulate the
burgeoning industry.

In the first case, the SEC made its first-ever actions against a
crypto hedge fund, alleging that California-based fund manager
Crypto Asset Management LP misrepresented itself as the country’s
“first regulated crypto asset fund” and operated unregistered.

The agency also took action against a self-described initial coin
offering (ICO) “super store,” named Token Lot, for failing to
register as a broker while connecting buyers with digital
assets. 

The Financial Industry Regulatory Authority, the self-governing
authority that regulates the brokerage industry, meanwhile,
issued its first-ever disciplinary action to an unregistered
cryptocurrency security called Hemp Coin. 

Regulators continue to debate whether cryptocurrencies should be
classified as securities, meaning they would be regulated
similarly to stocks by the SEC.

Earlier this week, a federal judge ruled that US securities laws
should govern initial coin offerings, echoing the view of SEC
chair Jay Clayton who said in February that he had never seen an
ICO that wasn’t a security. ICOs are where startups
issue their own cryptocurrency in exchange for money to build
their business.

Securities lawyers say that as the crypto industry has matured,
it’s only natural that regulatory agencies are playing catch up
and applying existing rules to these new assets.

“Laws that currently exists get
supplied as industry grows and changes,” said Jonathan
Shapiro, a securities litigation partner at Baker Botts LLP.
“But I think the SEC would say they are enforcing
traditional, basic principles, and enforcing them in a way that
reflects the modern reality of their markets.”

Still, firm rules might add legitimacy to certain crypto
companies in the long run. 

“Any given business or individual
participant will prefer to operate in a less regulated
environment, but if you are going to comply with the rules, you
will at least benefit from knowing what the rules are,” Shapiro
said. 

Other lawyers say that there’s some concern in the crypto
industry that tightening regulations will scare away investment
opportunities from US investors.

Clyde Tinnen, a partner at Withers LLP, said there are
ICOs intentionally prohibiting U.S. investors from
participating because they don’t want to be subject to U.S.
financial regulators. 

He pointed to one $500 million ICO that closed and did not want
U.S. investors for this reason.

Still, the market for ICOs isn’t slowing down. Nearly $19 billion
has been raised for ICOs so far this year, according to data from
Coinschedule.com. 

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