Two US financial regulators issued a string of actions earlier this week against companies that have been involved with cryptocurrencies, in the first major attempts to regulate the burgeoning industry.
In the first case, the SEC made its first-ever actions against a crypto hedge fund, alleging that California-based fund manager Crypto Asset Management LP misrepresented itself as the country’s “first regulated crypto asset fund” and operated unregistered.
The agency also took action against a self-described initial coin offering (ICO) “super store,” named Token Lot, for failing to register as a broker while connecting buyers with digital assets.
The Financial Industry Regulatory Authority, the self-governing authority that regulates the brokerage industry, meanwhile, issued its first-ever disciplinary action to an unregistered cryptocurrency security called Hemp Coin.
Regulators continue to debate whether cryptocurrencies should be classified as securities, meaning they would be regulated similarly to stocks by the SEC.
Earlier this week, a federal judge ruled that US securities laws should govern initial coin offerings, echoing the view of SEC chair Jay Clayton who said in February that he had never seen an ICO that wasn’t a security. ICOs are where startups issue their own cryptocurrency in exchange for money to build their business.
Securities lawyers say that as the crypto industry has matured, it’s only natural that regulatory agencies are playing catch up and applying existing rules to these new assets.
“Laws that currently exists get supplied as industry grows and changes,” said Jonathan Shapiro, a securities litigation partner at Baker Botts LLP. “But I think the SEC would say they are enforcing traditional, basic principles, and enforcing them in a way that reflects the modern reality of their markets.”
Still, firm rules might add legitimacy to certain crypto companies in the long run.
“Any given business or individual participant will prefer to operate in a less regulated environment, but if you are going to comply with the rules, you will at least benefit from knowing what the rules are,” Shapiro said.
Other lawyers say that there’s some concern in the crypto industry that tightening regulations will scare away investment opportunities from US investors.
Clyde Tinnen, a partner at Withers LLP, said there are ICOs intentionally prohibiting U.S. investors from participating because they don’t want to be subject to U.S. financial regulators.
He pointed to one $500 million ICO that closed and did not want U.S. investors for this reason.