The SEC's State of Play on Cryptocurrency

In an article published in the latest issue of the Journal of Robotics, Artificial Intelligence & Law (RAIL), Tom Potter discusses the current state of regulatory efforts by the U.S. Securities and Exchange Commission. Unlike the 1900's, today's cryptocurrencies rely on the internet, high-speed computing and higher-math cryptography, not stones.

Mt. Gox holds its infamous part of Bitcoin's history as the once biggest cryptocurrency exchange that went under in a chaotic fashion. After the 2014 collapse of Mt. Gox underscored the fraud potential posed by cryptocurrencies, regulators have been rushing to catch up to investors' enthusiasm for cryptocurrencies.

The SEC has ramped up its activity in this space, launching a Cyber Unit in 2017. By end of FY2018, the SEC reported over 225 ongoing cyber-related investigations and this October launched FinHub - its Strategic Hub for Innovation and Financial Technology, as a resource portal, a means of public engagement with the staff and clearinghouse for information.

Although cryptocurrencies themselves have been recognized as "commodities" under the Commodity Exchange Act, depending on the circumstances, they may also be "securities."

The SEC's focus so far has centered on coin offerings, secondary trading, and funds. Cybercurrencies present difficult regulatory issues: Commissioners of both the SEC and the Commodities Futures Trading Commission (CFTC) have noted that nation-based regulatory regimes built to oversee intermediaries are ill-suited to a disintermediated digital marketplace transcending nation-states.

The SEC's jurisdiction centers on "securities." But the other elephant in the United States' regulatory room is the CFTC, which has jurisdiction over cybercurrencies as "commodities," subject to regulation under the Commodity Exchange Act.

Potter anticipates the future for such markets, "Expect technological and market developments to continue to drive regulatory response, even as regulators attempt to adapt existing (perhaps, ill-suited) regulatory regimes to fit them. Until those opposing forces reach some sort of equilibrium, regulatory uncertainty will continue to frustrate the maturation of these markets," he details.

Posted in: Cryptocurrency, SEC
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