The US government's regulatory approach to cryptocurrencies remains complex and often vague. Even as calls for additional clarity from lawmakers escalates and the dialogue continues, uniform transparency is still illusive.
As digital assets enter the more mainstream investment landscape, they've also suffered an identity crisis from a regulatory perspective. Variously identified as money, a security, property or a commodity, many blame this opacity for confounding the adoption of the asset class. To further add to the confusion, in the US there are multiple regulators overseeing the space, including the SEC, the CFTC, the FDIC, the Office of the Comptroller of the Currency (OCC) and the IRS. In many cases, each has its own area of oversight, further confounding the smooth uptake of regulatory conformity.
We are triangulating towards regulatory clarity says Angela Walch, associate professor at St. Mary's University School of Law in Texas and a Research Fellow at the Center for Blockchain Technologies at University College London. But, she notes, it's not fast enough for the crypto industry’s tastes.
“Each new enforcement action by the SEC and CFTC seems to be focusing on a slightly different behavior, with the goal of slowly clarifying which activities are problematic. Overall, US regulators still are attempting to walk the line of protecting consumers while not stifling innovation, but we are definitely seeing more industry pushes for greater clarity, with some new industry lobbying organizations forming in 2018.”
Global regulatory competition is also underway, she explains, with a number of small jurisdictions like Malta, Gibraltar, and Bermuda embracing the crypto sector, in order to attract jobs.
“My fear is we may be heading towards a race to the bottom with global crypto regulation. US regulators are facing increasing pressure from industry to be more industry-friendly, with the threat of losing jobs and investment capital to foreign jurisdictions."
"I’m not sure how long the SEC will be able to hold the line on Bitcoin and other crypto ETFs,” she adds.
With the existing alphabet soup of Federal regulatory agencies, it's conceivable that financial infractions and frauds can slip beneath the radar, since each agency provides its oversight separately. But the recent joint effort by the SEC and the CFTC, coupled with a a fair amount of regulatory transparency, shows how prompt action and agency cooperation can work to benefit US cryptocurrency investors.
In order to understand how muddled certain aspects of current regulatory guidelines are, and how quickly proper oversight can suss out scams, the shut-down of cryptocurrency exchange 1Broker makes a good a case study. On September 27, 2018, the SEC announced it was filing charges in the US District Court for the District of Columbia against 1Pool Ltd., which was also doing business as 1Broker. The Marshall Islands-based company offered security and commodity swaps to customers, payable in Bitcoin. A second suit, for the same charges, was brought against the company's Austria-based CEO Patrick Brunner.
The company's business model wouldn't necessarily have been a problem if none of their investors had been based in the US. However, once American investors are in the picture—as was the case in this situation—1Broker was in violation of Federal securities laws by doing business without meeting the "discretionary investment thresholds required" by US regulators.
Commenting on this case, which has a few layers, Trace Schmeltz, a partner in the Chicago office of law firm Barnes & Thornburg LLP, notes that the SEC and the CFTC demonstrated the efficacy of a coordinated approach to regulating financial markets that impact US investors by filing two complaints.
“Interestingly, 1Broker is a Republic of the Marshall Islands company operated out of Austria. And, yet, it takes Bitcoin from US investors—putting it squarely under US jurisdiction. These two complaints allege that 1Broker has been operating an unregistered exchange for, and selling unregistered instances of, “contracts for difference” (CFDs).”
CFDs which are illegal in the US, are a vehicle that allows an investor to take a position in an underlying asset without actually owning that instrument. A CFD rises and falls in value based on the movement of the underlying asset. It's a bet on the future direction of an asset without actually having a stake in that asset.
“1Broker was allowing investors to deposit Bitcoin into a wallet and use that as collateral for trading a CFD, in which 1Broker took the other side of the trade. 1Broker offered CFDs that reflected a security-based investment (like an exchange traded stock such as Alphabet/GOOGL) and those that reflected a commodity-based interest (like the West Texas Intermediate or “WTI,” a crude oil index).”
In each instance, 1Broker operated as a market intermediary. The CFTC filed its complaint regarding the CFDs that were based on commodities like WTI or gold, while the SEC simultaneously filed a complaint against 1Broker for the security-based CFDs it was selling.
In response, 1Broker tweeted that it would “fully cooperate with the authorities. If approved …, we will enable withdrawals for US customers as soon as possible.”
Bitcoin Exchange Guide reported that "users lost millions of dollars in funds," and that shortly after the SEC's announcement 1Broker's site disappeared from the internet. Cyprus-based website CoinSpeaker published a follow-up on Tuesday which reported that a read-only version of 1Broker's website had been uploaded allowing investors to ensure that their funds are safe.
As this action makes plain, US regulators are diligently policing global financial markets that may impact US investors—and will take coordinated action to stop anyone from offering trading opportunities that do not meet US regulatory requirements. That's the good news, but problems remain.
Jeffrey Alberts of Pryor Cashman LLP spent six years at the US Attorney’s Office for the Southern District of New York and is currently co-chair of Pryor Cashman's FinTech Group. He points out that there's still jurisdictional opposition among various US legislative bodies, particularly between regulators on the federal and state levels.
“It is worth mentioning regarding state versus federal regulation, there is a ballot going on between state regulators and the OCC over who is going to get to regulate FinTech companies. The state regulators don’t want the OCC to become the regulator of all these finTech companies ….”
Clearly, the struggle for complete transparency continues, but hopefully as the wins increase, regulators will come to some accord regarding how matters should be handled and via which agency.
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