US market regulators have warned the cryptocurrency industry, indicating that they will crack down on violations such as insider trading and fraud as vigorously as they pursue them in traditional finance.
In recent weeks, the Securities and Exchange Commission has filed a lawsuit against individuals for allegedly creating a $ 300 million “cryptographic pyramid and Ponzi scheme” as well as a case against a former employee of the cryptocurrency exchange Coinbase.
Agency officials, including President Gary Gensler, are wasting little time as this year’s turmoil in digital asset markets has left investors facing big losses. Although large swaths of the market are unregulated, the SEC uses pre-existing rules in traditional finance to oversee the cryptocurrency market.
“In traditional finance, these guys are under a microscope,” said Charley Cooper, chief executive of blockchain company R3 and former chief of staff at the Commodity Futures Trading Commission, the US derivatives regulator. He said, on the contrary, many cryptocurrency traders “weren’t paying attention” on the assumption that the rules would not apply.
The SEC’s case against the former Coinbase employee and his associates has had resonance because the regulator’s allegations are based in part on identifying at least nine tokens as securities.
Stocks, bonds and other securities are within the scope of scrutiny, but there is heated debate as to the extent to which crypto tokens should fall under this umbrella. The former Coinbase employee claimed he was “innocent of any wrongdoing”, while the exchange said it had “zero tolerance for this type of misconduct”.
The case has “brought the issue of potential insider trading and online fraud to the center of the minds of all cryptocurrency companies, to ensure they have adequate policies and procedures to prevent insider trading,” said Teresa Goody Guillén, partner. of BakerHostetler, a US law firm.
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The largest exchanges claim to have long-standing confidentiality obligations on employees. A Binance spokesperson said every employee is “bound to a 90-day suspension on any investment made and company leaders are required to report any trading activity on a quarterly basis.”
Coinbase said the exchange has had confidentiality obligations for employees since 2012 and formal digital asset exchange policies in place since 2018, six years after the exchange was established. Bitfinex claimed to have “appropriate” policies and procedures against insider trading. Several other large cryptocurrency exchanges, including FTX, have not responded to FT’s inquiries about policies in place to identify or mitigate insider trading.
Recent SEC cases have also ruffled the feathers in Washington, where lawmakers are debating the framework for regulating crypto assets but have yet to reach a consensus.
In the absence of specific rules, Gensler has repeatedly insisted that his agency lead the U.S. approach to cryptocurrencies, arguing that many digital assets are stocks. To help his argument he cited cases and precedents set in US law decades ago.
The allegations against the former Coinbase employee were “a glaring case of ‘regulation by enforcement’,” CFTC commissioner Caroline Pham said last month. “The SEC allegations could have broad implications beyond this single case, underscoring how critical and urgent it is for regulators to work together.”
And while the SEC controls the territory, some lawmakers in Washington are also trying to limit its influence in the cryptocurrency industry.
On Wednesday, Senators Debbie Stabenow and John Boozman sponsored a consumer protection bill that would give the CFTC exclusive jurisdiction over digital commodity trades. While few expect the bill to become law, observers say the proposal could affect other laws in the future.
Peter Fox, partner of Scoolidge, Peters, Russotti & Fox, said he had long expected a SEC crackdown.
“My suspicion is that they held fire over the winter as asset prices were really high and a lot of these businesses were quite popular and the exchanges were in the midst of a major advertising blitz… I just think the timing. of this process is not a coincidence “.
A securities litigation previously employed by the SEC stated that the regulator “tends to focus more meaningfully” during times of market turmoil in order to “avoid public criticism that there is somehow a market integrity problem “.
But others point out that the vacuum created by the lack of regulation meant that the SEC, as the most powerful regulator of US markets, had no choice but to act.
“If they don’t, you won’t be left to bring punitive action outside the Justice Department,” said Charlie Steele, a former US government attorney and now a partner in the Forensic Risk Alliance, a consulting firm. legislation. “It highlights the need for these prudential regulators to understand this.”
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