Yesterday, January 4, 2018, the three prominent figures of the U.S. Securities and Exchange Commission (SEC) endorsed the concerns raised in the North American Securities Administrators Association (NASAA)’s cautionary directive on cryptocurrencies, ICOs, and other “Cryptocurrency-Related Investment Products.” Jay Clayton, the Chair of the SEC; Michael Piwowar, the former acting Chair of the SEC; and Kara Stein, a prominent figure in the SEC and an author of the 2010 Dodd-Frank Act, joined NASAA, the association that is the voice of state securities agencies in the U.S., in urging “Main Street investors” to go beyond the headlines and hype to understand cryptocurrency investment risk.
While this is not the first SEC commentary we have seen on cryptocurrencies, this iteration of caution raises the imminent possibility of the SEC and NASAA intervention into the space, as the SEC-lauded directive showed that 94 percent of state and provincial securities regulators (or roughly 63 of the 67 securities regulators under NASAA) believe there is a “high risk of fraud” involving cryptocurrencies and that all of the securities regulators believe “more regulation is needed for cryptocurrency to provide greater investor protection.”
Of note: Membership in NASAA not only comprises all 50 state securities regulators in the U.S. but also includes securities regulators in Canada and Mexico (as well as the U.S. Virgin Islands and Puerto Rico. According to Bob Webster, Director of Communications for NASAA, the survey referenced in the directive included NASAA members from the U.S., Mexico and Canada.
The SEC statement by the three most prominent figures in the organization called the NASAA release “a timely and thoughtful reminder,” reminding investors themselves that “when they are offered and sold securities, they are entitled to the benefits of state and federal securities laws.” From a legal standpoint, this comment implies that some or all cryptocurrencies, ICOs and other cryptocurrency-related investment products will be deemed by the SEC as “securities” and that those offering these products may be soon facing accusations of selling unregistered securities in violation of U.S. Securities Laws.
There is a possible point of disparity between the NASAA directive and the coinciding SEC statement: whether cryptocurrencies are “currency.” The usual definition for currency includes the requirements they serve as an accepted medium of exchange and can be a store of value for market participants.
NASAA’s directive states that, “Cryptocurrencies are a medium of exchange that are created and stored electronically in the blockchain, a distributed public database that keeps a permanent record of digital transactions” (emphasis added).
The SEC statement, however, has a slightly different interpretation of the NASAA Directive: that cryptocurrencies “lack many important characteristics of traditional currencies, including sovereign backing and responsibility.” The SEC went further, stating that cryptocurrencies “are now being promoted more as investment opportunities than efficient mediums for exchange.”
This view, unchecked, would allow the SEC to step in to regulate these “investment opportunities.” Whether there was a differing view the SEC wished to convey, or the statement was meant to convey support of the NASAA directive while opening the door for broader SEC intervention into the space, only time will tell.
One final note: FINRA, the non-profit organization authorized by Congress to be regulator in charge in the U.S. for oversight and enforcement actions against broker/dealers on behalf of investor protection, was noticeably silent in joining the SEC and NASAA in issuing a new statement (the previous two warned investors not to fall for cryptocurrency-related stock scams and gave a primer on ICOs).
FINRA Media Relations Specialist, Dylan Menguy, responded to inquiry on FINRA’s view of the statements by the SEC and NASAA by referring Bitcoin Magazine to this press release where FINRA warned investors of cryptocurrency-related stock scams.
NASAA’s Bob Webster clarified the survey inclusion as referenced above in the article, and, when asked about the potential disparity discussed above, stated, “...I don’t see a discrepancy between the two views. Cryptocurrencies are a medium of exchange and they are being promoted as investment opportunities. For clarification on the SEC’s position, you should contact the SEC.”
At the time of this writing, the SEC has not responded to a request for comment.