This summer was a busy one for cryptocurrency regulators, with aggressive actions potentially signaling an increase in consumer protection compliance activity.
In August alone, the New York Department of Financial Services (“DFS”) brought its first enforcement action against a DFS-licensed “virtual currency business” – resulting in a $30 million settlement with cryptocurrency investing platform Robinhood Crypto, LLC – and the U.S. Securities and Exchange Commission charged 11 people in an alleged crypto pyramid and Ponzi scheme called Forsage. The U.S. Department of the Treasury’s Office of Foreign Assets Control sanctioned and banned currency mixer Tornado Cash, alleging that the platform laundered more than $7 billion in virtual currency since launching in 2019.
Cryptocurrency enforcement actions
These recent moves follow others that also signal regulators and justice officials are being more aggressive with crypto companies:
- In July, the Department of Justice charged a former Coinbase employee with insider trading, alleging he shared insider information that benefitted his brother and a friend. In that case, the SEC made the near-unprecedented move of labeling nine different crypto tokens as securities, a move signaling significant change to how crypto businesses will be treated going forward.
- Just weeks earlier, the DOJ criminally charged six people in four separate cases of alleged cryptocurrency fraud, including the largest known Non-Fungible Token scheme to date.
- Earlier this summer, DFS published its first guidance on stablecoins, requiring them to be fully backed by a reserve segregated from the issuers’ operational funds and attested to regularly by an auditor.
- The SEC announced in May it would increase its Crypto Assets and Cyber Unit by 20 positions, to a total of 50 positions dedicated to protecting investors from crypto and cyber threats.
Howey test and cryptocurrencies
In addition to these actions, Gary Gensler, chairperson of SEC, has repeatedly commented he believes most cryptocurrencies are securities as defined under the “Howey Test,” signaling the SEC intends to move forward with increased regulation the industry has long suspected would be forthcoming.
These moves indicate the United States is likely joining many other countries in increasing cryptocurrency (and likely digital asset) regulation. In industry, some also fear concurrent over-regulation, business expense and legal complexity, and with it the possibility of business moving abroad as the specter of penalties, fines and criminal prosecution increases.
As digital currency becomes increasingly mainstream, with an expanded role in corporate transactions, it is critical for business owners and financial institutions across all industries to keep abreast of legal and compliance issues.