Quick Reference Guide: US Regulation and Enforcement of Digital Assets

Investor enthusiasm continues to fuel the explosive growth of digital assets, including virtual currency and tokens, precipitating U.S. efforts to establish a cohesive regulatory and supervisory regime for them. Existing laws and regulators cover many of the activities of exchanges, traders, issuers and investors, but the new products and services at the heart of this wave often do not fit perfectly into an organization’s orbit. Although the Commodities Futures Trading Commission and the Securities and Exchange Commission have decided to give market participants an idea of ​​their jurisdiction and programs, the future treatment of digital assets and related activities remains characterized more by uncertainty than by clarity. Criminal prosecutors have made it clear that they have their own role in this evolving network and are ready to fill any perceived regulatory gap.

Recent regulatory and enforcement activity

UNITED STATES DEPARTMENT OF JUSTICE

National prosecutors for criminal offenses

  • Apparently focusing on how digital asset trading can be subject to the same forms of tampering as traditional markets (including spoofing and wash trading)
  • In April 2018, the co-founders of a cryptocurrency startup were charged with fraud, alleging they made false statements and omissions to raise more than $ 25 million in an initial coin offering.
  • In February 2018, a cryptocurrency trader was charged with fraud for misappropriating virtual currency assets to cover his own trading losses by transferring $ 2 million worth of Bitcoin and Litecoin from his employer’s trading account to personal accounts.

STATE ATTORNEYS GENERAL

Top Civil and Criminal Prosecutors in 50 States, District of Columbia and Puerto Rico

  • New York has taken the lead in digital assets and launched its Virtual Markets Integrity Initiative – an informational survey of the policies, procedures and practices of exchange platforms used by consumers to trade currencies virtual ones like Bitcoin and Ether.
  • New Jersey recently issued an emergency order to prevent a cryptocurrency-related investment entity from offering unregistered securities in New Jersey; the state is also reportedly conducting a broad survey of many companies sponsoring ICOs.

SECOND

National Securities Regulatory Authority

  • Has focused its enforcement efforts on ICOs and unregistered platforms that facilitate the exchange of ICO tokens, which, he warned, are often structurally similar enough to securities to be regulated as such.
  • In April 2018, two co-founders of an alleged financial services start-up accused two co-founders of orchestrating a fraudulent ICO that raised more than $ 32 million from thousands of investors.

CFTC

National regulator of raw materials

  • Focused enforcement efforts on identifying fraud and price manipulation in virtual currency.
  • In April 2018, many people charged with a fraudulent scheme involving binary options trading and a virtual currency known as an ATM coin.
  • In January 2018, fi filed a federal civil action against a company for fraud and embezzlement in connection with purchases and transactions of Bitcoin and Litecoin.

Jurisdiction of Law Enforcement and Regulatory Agencies

AGENCY SUPERVISORY OR LAW ENFORCEMENT ROLE
US Department of Justice (and Federal Bureau of Investigation)
  • Investigate and prosecute violations of U.S. criminal laws, including securities laws, wire and mail fraud, and certain (bribery of foreign government officials, money laundering, and sanctions violations) including corporate digital assets may not realize that they apply to them. Works closely with international law enforcement agencies in the UK and beyond.
  • Enforce relevant US laws extraterritorially and may claim jurisdiction over entities that use a US bank or clear dollars through the US financial system.
United States Securities Commission
  • Primary securities regulator for entities that are – or should be – registered under securities laws.
  • Said that many ICOs are securities that “very likely” need to be registered with the SEC or be exempt from private placement.
  • Regulates platforms that trade digital assets that are securities and platforms that function as an “exchange” as defined by US securities laws, requiring registration as a national stock exchange securities or an exemption (such as that for alternative trading systems).
United States Commodity Futures Trading Commission
  • Regulates futures, options and derivatives contracts involving virtual currency, as well as fraud or manipulation involving virtual currency traded in the United States
  • Typically does not regulate spot trading or transactions involving virtual currencies that do not use margin, leverage, or funding.
State Attorneys General 50 different, plus DC and Puerto Rico
  • Each is responsible for enforcing the laws of each state (for example, laws on money transfer, general consumer protection, and state investor protection), which can lead to several independent state-level investigations. , joint investigations with other states and parallel investigations with federal agencies.
State regulators
  • State regulators oversee state-chartered banking organizations and fund issuers engaged in virtual currency activities, including activities involving consumer protection and anti-money laundering laws.
  • State securities regulators oversee ICOs (which may require state registration) and investigate fraud, market manipulation, and investor protection related to virtual currency activities.
Other federal agencies
  • The Financial Crimes Enforcement Network enforces U.S. anti-money laundering laws to combat the use of virtual currency for illicit purposes, including the financing of terrorism, human trafficking, and other financial crimes.
  • The U.S. Secret Service has broad powers to detect and arrest individuals who violate certain federal laws relating to bank fraud, coins, securities, and electronic funds transfers.
  • Prudential regulators of banks (Federal Deposit Insurance Corp., Offi ce of the Comptroller of the Currency, Federal Reserve) are interested in the risk profile of banking companies by American institutions and the services that these institutions provide to virtual currency providers , stock exchanges and lenders.
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