The Securities and Exchange Commission (SEC) brought 75 enforcement actions against cryptocurrency firms and individuals from July 1, 2013 to Dec. 31, 2020, resulting in $1.77 billion in penalties. According to a new report by Cornerstone Research, the agency also brought 19 trading suspension orders against digital asset market participants. 43 were litigated in U.S. district courts.
The most common allegations over the study period involved:
- Allegations of fraud (52%)
- Unregistered securities offerings (69%)
- 28 actions (37%) contained allegations of both fraud and unregistered securities offerings.
More than half of all enforcement actions alleged unregistered securities offering violations related to initial coin offerings, or ICOs.
Three actions were brought by the SEC in parallel with the Commodity Futures Trading Commission (CFTC), highlighting the SEC’s and CFTC’s commitment to coordinating enforcement efforts.
Coinbase and LBRY face penalties
Recently, CFTC fined Coinbase $6.5M for False, Misleading, or Inaccurate Reporting and Wash Trading (19 March 2021). Coinbase paid $6.5M to settle the CFTC’s claims that it reported misleading transaction data. According to the CFTC, between January 2015 and September 2018, Coinbase delivered false, misleading or inaccurate reports concerning transactions in digital assets. The CFTC alleges that two trading programs operated by Coinbase-generated orders traded with each other, which could have misled traders about the trading volume. In addition, Coinbase was fined for “wash trading” Litecoin and Bitcoin transactions conducted by a former employee of Coinbase.
The SEC filed a lawsuit against digital content platform LBRY for the unregistered offering of securities in the form of a digital asset, called LBRY Credits (29 March 2021). According to the SEC complaint, LBRY communicated to investors that the funds raised from the sale of LBRY Credits were to be used to fund LBRY’s business and build its product. Using its website and social media, LBRY presented to the public that LBC would appreciate in value if the LBRY network grew its functionality, usability and consumers. The SEC seeks a permanent injunction enjoining LBRY in selling any unregistered securities offerings.
Cryptocurrency regulation continues to increase
The regulatory momentum that began in 2020 will continue as regulators seek to either fit cryptocurrency into existing regulatory frameworks or build out new approaches.
Recently proposed regulations could present significant compliance burdens for the banks and money service businesses (MSB) that engage in cryptocurrency transactions. Financial Crimes Enforcement Network (FinCEN) issued a proposal on December 18, 2020, imposing a reporting and recordkeeping burden on banks and MSBs.
The proposal was made pursuant to the Bank Secrecy Act (BSA). The proposed reporting and recordkeeping rules are similar to the rules for transactions in currency and for bank wire transfers. Unlike other recordkeeping requirements, the recordkeeping requirement in the proposal would obligate the electronic retention of information.
Such recordkeeping is the practical way businesses engaged in cryptocurrency transactions are likely to track their data. It is also the most efficient form in which data can be provided to law enforcement and national security authorities. Furthermore, the information must be retrievable by the bank or MSB by reference to the name or account number of its customer, or the name of its customer’s counterparty.
How to prepare for crypto regulation
Despite the focus of regulatory actions to date, firms considering the addition of cryptocurrency investment offerings should not overlook the implications for electronic communications regulatory obligations. As we noted in a previous post, this entails an assessment of current recordkeeping and supervisory practices to ensure that cryptocurrencies can be controlled, managed and reviewed as an asset class and not just an alternate form of currency.
Existing financial market participants will need to ensure that the unique risks of cryptocurrencies highlighted by recent SEC and Financial Industry Regulatory Authority (FINRA) guidance are outlined within written supervisory procedures (WSPs). The WSPs must be reviewed to include all communications sources approved for use by firm employees. This should be done whether communications are conducted only through email, or include modern tools like Slack, Zoom or any mobile application in use today.
For non-traditional market participants, delivering client-facing services to address the time-to-market pressure of an exploding market category was likely a higher investment priority than compliance infrastructure. However, as regulators continue to focus on crypto assets, further enforcement actions are almost certain to follow. The time to invest in modern, robust, automated compliance controls for electronic communications is now.
Author: Marianna Shafir Esq. Regulatory Advisor at Smarsh
Marianna is responsible for regulatory affairs worldwide. With her expertise in financial services industry, compliance and e-discovery, Marianna counsels Smarsh clients on meeting regulatory obligations, leveraging technology and guidance on best practices related to electronic communications supervision. Prior to joining Smarsh, Marianna worked for BNY Mellon and Invesco where she was an instrumental member on compliance teams. Marianna has also served as an adjunct professor at New York Career Institute where she taught Law Office Management and Real Estate Law. She earned her Juris Doctorate from Nova Southeastern University. She is a frequent speaker at industry conferences and a contributor to various online publications.
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