Cryptocurrencies like Bitcoin have been spreading like cyber-kudzu during the past couple of years in certain corners of the online investing world. More cautious investors still might be hanging back to make sure they’re not a crypto-bubble. And now all investors have a reason to hesitate: a series of legal and regulatory investigations that call into question their stability as investments.
Among the recent developments that could give would-be investors pause:
- The U.S Securities and Exchange Commission in May announced that it had secured injunctive relief to halt alleged “ongoing fraud” by an unregistered, non-exempt Initial Coin Offering (ICO) that had raised as much as $21 million in cryptoassets. Titanium Blockchain Infrastructure Services, Inc., EHI Internetwork and Systems Management, Inc., and Michael Stollery, a self-described “block chain evangelist,” were collectively accused of fraud in connection with purchase, offer or sale of securities under both the Securities Exchange Act and the Securities Act. The SEC alleged that the defendants created a digital asset known as BAR and TBAR tokens, orchestrated a social media campaign based on false corporate relationships—including, most egregiously, a supposed link with the Federal Reserve Bank—and false testimonials to show their supposed expertise. The complaint further alleged that the group of defendants had generated demand by offering various incentives and creating a sense of urgency, then inflated the price of the tokens on the secondary market in a “pump and dump,” or “create and inflate” scheme. Such schemes are seen as a widespread problem on crypto-exchanges.
- Former New York Attorney General Eric Schneiderman, who resigned on May 8 after several women accused him of sexual assault, in April announced that he would launch a fact-finding inquiry into 13 cryptocurrency exchanges. This came as part of a broader investor protection effort to promote transparency and accountability among cryptocurrencies. Each was sent a questionnaire about their ownership, fees, trading suspensions, possible money laundering and other issues. At least one of them, San Francisco-based Kraken FX, said it would not comply. “Legitimate entities generally like to demonstrate to their investors that their money will be protected,” wrote Amy Spitalnick, spokesperson for the New York Attorney General’s Office, in an e-mailed statement to the New York Law Journal. “This is very basic information that any credible platform should have on hand and be willing to share with their investors.” Retorted Jesse Powell, CEO and co-founder of Kraken, on Twitter: “Somebody has to say what everybody’s actually thinking about the NYAG’s inquiry. The placative kowtowing toward this kind of abuse sends the message that it’s ok. It’s not ok. It’s insulting.”
- In March, the Wall Street Journal reported that the SEC had launched a wider investigation into the cryptocurrency market that involved dozens of subpoenas and information requests to companies and advisers involved in the marketplace. ICOs were the central target of the subpoenas, as regulators sought more information about the structure of the sales. SEC Chairman Jay Clayton told a Senate panel in February, however, that he’s not sure the digital asset class is governable under the SEC’s current framework for transactions. “We are open to exploring with Congress, as well as with our federal and state colleagues, whether increased federal regulation of cryptocurrency trading platforms is necessary or appropriate,” he said in prepared testimony. “We also are supportive of regulatory and policy efforts to bring clarity and fairness to this space.”