What enforcement actions can we expect in the world of “cryptocurrency,” also commonly referred to as “blockchain” and “distributed ledger technology” (DLT)? 

Robert Cohen, the director of the U.S. Securities and Exchange Commission's (SEC) Cyber Unit, spoke on October 19, 2018, and his remarks provide some insights into the Commission’s cryptocurrency enforcement priorities. 

Federal Regulators’ Recent Activity with Respect to Cryptocurrency

The past seven days have been tumultuous for the cryptocurrency world.  Federal regulators and law enforcement recently announced settlements and the press reported investigations.  On Friday, November 16, the SEC announced settlements with two “Initial Coin Offering” (ICO) issuers.  This news came just eight days after the SEC announced it settled with the founder of a “decentralized” exchange, EtherDelta.  And this Monday, November 19, Bloomberg reported that the Department of Justice (DOJ) is investigating Tether, which is a “stable coin” closely linked to the Bitfinex exchange. 

What appears most significant about the past week’s events is that they effectively erased any residual doubt that “decentralized” projects such as ICOs or exchanges might escape the jurisdiction of U.S. law enforcement and regulators. 

SEC Enforcement Priorities

Back in October, Cohen spoke at the LA County Bar Association’s annual Securities Regulation seminar.  He said the unit’s two current priorities are (1) ICOs and digital assets and (2) trading based on the nonpublic information obtained in security breaches.

ICOs and digital assets refer to offerings and sales of cryptocurrency (sometimes referred to as “tokens” or “coins”) to retail investors via the internet.  These offerings and sales leverage DLT (“blockchain”) to accept payment and to distribute the digital assets.  There are a number of exchanges, many offshore, which facilitate trading in these digital assets.

Most notably, Cohen outlined the questions he asks when evaluating a potential cryptocurrency investigation: 

• Is there a fraud?
• Is it ongoing?
• Is it big?
• Who are the individuals involved?
• Is it possible to discover their identities?
• Where are the assets?
• Are they recoverable?
• Were gatekeepers involved?

Cohen also said that the Commission plans to pursue the issuers of smaller offerings when resources permit.  He said that when the assets are beyond reach, the DOJ, the U.S. Attorney’s offices, and the Federal Bureau of Investigation (FBI) will pursue the culprits. 

Cohen explained that in digital asset and ICO cases, the Commission has the rare ability to bring actions under Section 5, referring to the Securities Act of 1933’s requirement that an issuer register securities with the SEC before offering them to the public, not sell securities before its registration statement is declared effective by the SEC, and not violate the Act's prospectus requirements. 

(As is typical of statements from SEC officials, Cohen said that his views do not necessarily represent the views of the Commission, its staff, or others.) 

About me

Likely patterns of enforcement in the cryptocurrency and DLT world are of interest to me.  I’m a third-year law student who’s interested in – and I have a bit of relevant professional experience in – financial regulatory matters. 

I completed courses in Securities Regulation in Fall 2017 at Pepperdine Law and was fortunate to study at Georgetown Law Center in Summer 2018, where I completed a course in Securities and the Internet and audited a White Collar Crimes course.  Current/former SEC and DOJ staff taught those courses, respectively.  I also worked at the American Action Forum (AAF) on financial services policy, where I analyzed financial regulators’ proposed rules.  Before that, I worked in government relations at Invariant, where I had the privilege of monitoring legislative and executive developments for the financial services and technology practice groups. 

I expect to publish a more substantial post on DLT when time permits (I’m currently preparing for law school finals and a mock trial for Trial Advocacy class).