SEC Chairman Views Cryptocurrency Markets as the “Wild West” and Calls for More Investor Protection

During a recent speech discussing the intersection of national security with cryptocurrencies at the Aspen Security Forum, Gary Gensler, the new Chairman of the Securities and Exchange Commission (SEC), made clear the SEC will use its broad powers to continue protecting investors from the volatility associated with cryptocurrency markets which he characterized as the “Wild West.”  He also urged Congress to grant the Commission additional powers and resources to prevent products, transactions, and cryptocurrency platforms from falling between “regulatory cracks.”  Gensler explained it was no longer sustainable for “large parts” of cryptocurrency markets to operate outside “regulatory frameworks that protect investors and consumers, guard against illicit activity, ensure for financial stability, and … protect national security.”  Greater investor protection is needed because, according to Gensler, cryptocurrencies are a highly speculative asset class that is “rife with fraud, scams, and abuse.”

Areas Where Regulatory Gaps Exist

Gensler pointed to several areas where more investor protection is needed.  Three stand out:

• Unregistered securities. Gensler noted that although many cryptocurrency products are subject to SEC oversight, the crypto market is still filled with unregistered offerings, inadequate disclosures, and prices prone to manipulation. He alluded to the multiple enforcement actions brought by the SEC to crack down Initial Coin Offerings (ICOs), a popular capital-raising method used for cryptocurrency ventures.  For instance, in June 2020, the SEC reached a multi-billion dollar settlement with Telegram over the unregistered offering of its digital tokens.  The SEC has also hit famous individuals for improperly promoting ICOs.
• Cryptocurrency platforms. Gensler stressed that crypto trading platforms, lending platforms, and other “decentralized finance” platforms (DeFi) implicate securities, commodities, and banking laws.  More importantly, he made clear that if securities are trading on these platforms they need to register with the SEC unless an exemption applies.  A few days ago, the SEC reached a $13 million settlement with DeFi lender Money Market and a $10 million settlement with Poloniex for operating an unregistered digital asset exchange.  These actions may signal a more aggressive stance by the SEC targeting cryptocurrencies as securities and an upcoming wave of enforcement actions against exchanges or marketplaces.
• Stablecoins. These are cryptocurrencies designed to reduce volatility by being pegged to a “stable” reserve asset like the U.S. dollar or gold.  Gensler noted that the stablecoin market is worth around $113 billion and that they are embedded in crypto trading and lending platforms.  He further cautioned about its potential use to “sidestep” anti-money laundering, tax, and sanctions compliance while he clarified stablecoins can be deemed securities or investment companies to the extent they reflect an investment in underlying securities.

The SEC and other regulators pay rewards to whistleblowers with information about cryptocurrency fraud

Cryptocurrency fraud comes in many shapes and forms, including fraudulent ICOs, pump and dump schemes, market manipulation, and Ponzi schemes.  Whistleblowers are often well-placed to uncover crypto scams and bring them to regulators’ attention.  Since crypto markets implicate various laws, several federal agencies (apart from the SEC) are also on the beat regulating cryptocurrency markets.  Examples include the Commodity Futures Trading Commission (CFTC), the Internal Revenue Service (IRS), and the Financial Crimes Enforcement Network (FinCEN).  Each agency relies on whistleblowers to assist with their enforcement efforts.

The SEC and the CFTC pay whistleblowers who provide information about cryptocurrency fraud if their information helps them bring an enforcement action where over $1 million in monetary sanctions is ordered. Whistleblowers stand to receive between 10% and 30% of the amounts collected. Both programs offer confidentiality, anti-retaliation protections, and whistleblowers do not need to be an employee-insider to qualify for an award. Any person – regardless of their citizenship or residency, can file a whistleblower tip. Whistleblowers may receive more money if their information is also used in related actions brought by other regulators or authorities.  The SEC and CFTC have expressly recognized the key role whistleblowers play in their investigations, helping them recover money stolen from harmed investors.  The SEC has paid close to $956 million to whistleblowers since its first award in 2012, whereas the CFTC has awarded over $120 million in whistleblower payouts since 2014.

The IRS which regulates crypto as assets or property also offers rewards of at least 15% to 30% if the information provided by whistleblowers helps the IRS collect over $2 million.  Where cryptocurrency is used in money laundering and violations of the Bank Secrecy Act are involved, FinCEN’s new Anti-Money Laundering Whistleblower Program provides an avenue for reporting violations and rewards of up to 30% of the amounts collected.

As the expansion of cryptocurrency markets continues, whistleblowers will remain powerful allies of regulators and criminal authorities in their vigorous enforcement of cryptocurrency regulation triggering much needed transparency and accountability.

The Whistleblower Team at Constantine Cannon is highly experienced in helping potential whistleblowers evaluate their claims. If you would like to know more or schedule a confidential consultation, please contact us to see how we can help.

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• Cryptocurrency Fraud
• SEC Whistleblower Program
• CFTC Whistleblower Program
• Fraud Regulated by the CFTC
• Financial & Investment Fraud
• Market Manipulation & Trading Violations
• Ponzi & Pyramid Schemes
• Securities Fraud
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Tagged in: Cryptocurrency, Financial and Investment Fraud, Fraud in CFTC-Regulated Markets, Insider Trading, Market Manipulation and Trading Violations, Ponzi Schemes, Securities Fraud, Whistleblower Rewards,