Make a note on your calendars – January 2018 was when it all changed. The freewheeling world of cryptocurrency ran headlong into an intractable wall of US regulators.
Not that there weren’t hints of regulatory action in the air. The Securities and Exchange Commission had already shut down two initial coin offerings (ICOs) in December and rolled out a cyber unit with ICOs under its purview, but regulators put down their marker and turned the heat on full blast last month.
A Wall Street Journal op-ed by SEC Chair Jay Clayton and Commodity Futures Trading Commission Chair J. Christopher Giancarlo put the industry on notice and that was only the beginning.
On Jan. 30, the SEC halted another ICO, the third in the last two months. Separate reports found the CFTC has issued subpoenas to one of the world’s largest cryptocurrency exchanges, created a “heightened review” process for virtual currencies, and charged a cryptocurrency for allegedly scamming investors out of $6 mln.
And, possibly in response to the op-ed, or maybe the half-billion-dollar digital coin theft from a Japanese exchange, Facebook announced it would ban all ads promoting cryptocurrency.
On Tuesday Feb. 6 the Senate Committee on Banking, Housing, and Urban Affairs held a hearing exclusively devoted to virtual currencies with Clayton and Giancarlo as the sole witnesses.
“The message is getting through that this is not off the grid,” Giancarlo told the committee. “Now you are seeing it in the Bitcoin prices as word is getting out that we will go after misconduct.”
For an industry that has seen explosive growth, but largely avoided regulation, these moves come as a sea change.
The industry topped $700 bln in January, and one analyst projected it has a “longer term” potential of $10 tln. But regulatory scrutiny could dampen that growth.
As the op-ed noted, “The SEC will vigorously pursue those who seek to evade the registration, disclosure and anti-fraud requirements of our securities laws.” And all participants in the industry are being closely monitored, including “broker-dealers, investment advisers and trading platforms.”
These warnings ensure a windfall for the legal community that has already dabbled in the cryptocurrency industry. Several large firms have practices focused on Blockchain and digital coins, but others will soon follow, and the practices will only grow and become more sophisticated.
In this new era, small upstart cryptocurrency players, without the capital for proper due diligence, will likely fold or never make it to market in the first place. And the major players will look to secure their position and reach a broader audience, retaining the legal firepower necessary to win regulators’ blessing.
Cryptocurrency providers now must be able to go a step further in telling their stories and reach a broader investor base. This includes engaging the media to succinctly explain how their products work, what their value is and what legal due diligence is backing them. In doing so, they can tout their compliance process and continued oversight, and even cite the high-profile law firm doing the work.
Ultimately, the cryptocurrency industry has some difficult labels to overcome, like “scam” and “fraud,” not to mention the recent statements by regulators.
Last year was marked by unprecedented growth for the industry, but 2018 will usher in a new era of due diligence and transparency. With the start of the year, the SEC and CFTC essentially forced the digital coin companies’ hand.
As Clayton and Giancarlo noted in their op-ed: “Market participants, including lawyers, trading venues, and financial services firms, should be aware that we are disturbed by many examples of form being elevated over substance, with form-based arguments depriving investors of mandatory protections.”
Now cryptocurrency companies must act or risk becoming regulators’ next victim.