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Regulators Step Up Crypto Fraud Enforcement

State & Federal Regulators Coordinate Efforts To Combat Crypto Fraud


State and federal securities regulators have been keenly focused upon fraud in the digital currency niche of late.

On May 21, 2018, the North American Securities Administrators Association announced one of the largest coordinated series of enforcement actions by state and provincial securities regulators in the United States and Canada to crack down on fraudulent Initial Coin Offerings, cryptocurrency-related investment products and those behind them.

NASAA members from more than 40 jurisdictions throughout North America participated in “Operation Cryptosweep,” which, according to reports, has resulted in nearly 70 inquiries and investigations and 35 pending or completed enforcement actions related to ICOs or cryptocurrencies since the beginning of May.

NASAA members are conducting additional investigations into potentially fraudulent conduct that may result in additional enforcement actions.

The SEC Chairman subsequently stated that “[S]tate and provincial regulators play a critical role in protecting Main Street investors. When investors are offered and sold securities, whether through traditional channels or through an ICO on a sales-oriented website, state and federal securities laws apply.”

Also on May 21, the Commodity Futures Trading Commission (CFTC) and NASAA signed a mutual cooperation agreement to establish a closer working relationship between the federal commodity regulator and individual state securities agencies.

The agreement provides a framework for the sharing of confidential information between the CFTC and state securities regulators in the United States.

The purpose of the information-sharing agreement is to assist participants in enforcing the Commodity Exchange Act, which state securities regulators and state attorneys general are statutorily authorized to do alongside the CFTC. The information shared under the agreement could also generate enforcement actions under state securities laws, commodity codes, or other areas of law.

“State securities regulators look forward to strengthening our bond with the CFTC to enhance investor protection and prevent fraud,” the NASAA President said. “NASAA members are unique among all federal and state regulators in that they can bring enforcement actions for both securities law and commodities law violations. This is particularly relevant given the recent epidemic of schemes involving cryptocurrencies and other modern types of commodities.”

“This agreement provides the CFTC and NASAA an opportunity to build on our long-standing cooperative relationship,” said the CFTC Chairman. “Information-sharing is key to cooperative enforcement operations, and by working together, we can ensure that the rapidly evolving financial technology space has the appropriate oversight to pursue bad actors, protect market participants, and allow for market-enhancing innovation.”

The CFTC has also issued an advisory opinion with respect to virtual currency derivative product listings.

Takeaway: The enforcement actions being announced by NASAA are a clear warning that regulatory agencies are paying close attention and coordinating at an international level. The SEC has also launching an educational webpage.

If you are interested in learning more about this topic, or if you are the subject of a regulatory investigation or enforcement action you can contact the author directly or follow him on LinkedIn at FTC attorney.

Richard B. Newman is an FTC defense lawyer and regulatory defense counselor at Hinch Newman LLP focusing on advertising and digital media matters. His practice includes conducting legal compliance reviews of advertising campaigns, representing clients in investigations and enforcement actions brought by the Federal Trade Commission and state Attorneys General, commercial litigation, advising clients on promotional marketing programs, and negotiating and drafting legal agreements.

ADVERTISING MATERIAL. These materials are provided for informational purposes only and are not to be considered legal advice, nor do they create a lawyer-client relationship. No person should act or rely on any information in this article without seeking the advice of an attorney. Information on previous case results does not guarantee a similar future result. Hinch Newman LLP | 40 Wall St., 35thFloor, New York, NY 10005.

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About Carol St. Amand

Carol St. Amand

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