SEC steps up authority over cryptocurrencies
To most investors or followers of the cryptocurrency markets, government regulation represents either a savior or pariah. As the first digital currency, Bitcoin was created in 2009 as a platform for the autonomous exchange of commerce, free from governmental or private entity oversight. All information regarding buyers, sellers and transaction data is transmitted, stored and secured via cryptology - a high-tech level of encryption using a blend of mathematics and computer science.
The success of Bitcoin as an anonymous and unregulated digital currency has spawned a multitude of other cryptocurrencies. Since January, more than 200 have been created. The total number of digital currencies is near 1,600, and quickly rising.
Moreover, the 200-plus global cryptocurrency exchanges – which serve as an electronic platform for buying and selling digital currencies – are continually besieged by theft and customer complaints of fraud, price manipulation and fabricated trades. In a continuing string of high-profile thefts, on January 26, Japan-based exchange Coincheck had more than $530 million of the digital currency NEM stolen by hackers. It is the largest hack ever, surpassing the 2014 theft of $450 million of Bitcoins at the now-defunct Mt. Gox exchange.
The industry’s dilemma is a lack of common standards. In the realm of cryptocurrencies, there are no restrictions on who can create their own digital currency or digital currency exchange. The rules, structure, integrity and quality of cybersecurity for these currencies and exchanges are determined solely by the individual creators.
But the Securities and Exchange Commission, tasked with regulating and enforcing the securities industry to protect investors and to ensure a fair and orderly marketplace, is quickly losing patience.
On March 7, the SEC released a statement that expands its authority over the cryptocurrency industry. First, it now classifies cryptocurrencies as securities. This decree, in effect, allows the SEC defacto control and oversight over digital currencies under the expansive umbrella of federal securities laws.
Second, it requires the handful of cryptocurrency exchanges that operate in the U.S. to register with the SEC or apply for a qualified exemption. In its commentary, the SEC notes “Many platforms refer to themselves as ‘exchanges,’ which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.”
Finally, the SEC will require the registration of all initial coin offerings, called ICO. An ICO is a highly unregulated process where the creators of a new digital currency raise public money to help fund their initial operation. In exchange, investors receive an allotment of the new currency in the hope its value will increase. Unfortunately, ICOs are ripe for numerous frauds and scams. Just last Monday, the SEC charged the co-founders of Florida-based Centra Tech Inc for its $32 million fraudulent ICO that had even obtained the endorsement of former world boxing champion Floyd.
The SEC feels compelled to formulate some sense of sanity to the existing free-for-all environment that drives the continuing fraud, theft and mismanagement. Yes, the SEC is moving slowly and is far from the standardized set of rules imposed on traditional exchanges such as the New York Stock Exchange or the Chicago Board of Trade. But the March 7 statement is a deliberate move to show the cryptocurrency industry its realm is completely under its jurisdiction.
Understandably, the cryptocurrency industry wishes to remain a decentralized and autonomous form of currency – the very foundation on which it was created. However, its avoidance for even self-regulation continues to place it in the crosshairs of national and international regulatory agencies. If it truly seeks to establish cryptocurrencies as a legitimate form of currency and mode to facilitate commerce, it needs to realize that regulation – either self-imposed or by some government entity – may well be the cost to achieve that endeavor.
Mark M. Grywacheski, Investment Advisor
Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.
Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
