On January 19, 2018, SEC Co-Enforcement Directors Stephanie Avakian and Steven Peikin and CFTC Enforcement Director James McDonald issued the following joint statement regarding virtual currency enforcement actions:
“When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments.”
This concise and pointed statement reinforces a clear tone from top officials at the SEC and CFTC that these regulators will continue to investigate potential fraudulent activity involving digital currencies, initial coin offerings and related products and ventures and, where appropriate, will pursue enforcement action against those who are involved. A challenge with which the regulators will continue to grapple, however, is the balance between pursuing their enforcement mandates, while at the same time encouraging – and attempting to not stifle – innovation in this space.
The SEC Division of Enforcement’s Cyber Unit has been actively targeting cyber-related misconduct involving distributed ledger technology and initial coin offerings since September 2017. This includes the commencement of several enforcement actions as well as stock trading halts for companies that purported to engage in blockchain or cryptocurrency activity. The trading halts related to, among other things, concerns over the accuracy and adequacy of information in the marketplace (including regarding business operations), statements about the plans of company insiders to sell their shares, and concerns over unusual and unexplained trading activity. The CFTC Division of Enforcement also has been active, including filing separate charges on January 18, 2018 against an alleged fraudulent virtual currency scheme and against an alleged fraudulent bitcoin and binary options scheme.
We will be watching closely for additional regulatory guidance and the inevitable commencement of additional enforcement activity.