The SEC has reportedly summoned the managers of several cryptocurrency-focused hedge funds. This sector has been rapidly growing over the past year and the American regulators apparently want to make sure they have a handle on the situation and to ensure that funds are not going to fields they disapprove of such as ICOs.
The U.S. Securities and Exchange Commission (SEC) has subpoenaed 80 cryptocurrency companies, including the $100 million cryptofund of TechCrunch founder Michael Arrington, according to CNBC.
Arrington told CNBC Thursday that he has received a subpoena, as has every cryptofund he has spoken to.
Arrington said he has no problem with the subpoena. He said the government has to figure out its rules for the market to follow.
It remains undetermined whether securities laws apply to digital coins. While the SEC has said digital coins are subject to regulations, it has not indicated how digital coin developers can comply with the regulations. As a result, cryptocurrency firms have had to rely on lawyers to distinguish their companies from cryptocurrency scams.
In some cases, cryptocurrency companies have chosen to ban U.S. investors from participating in their offerings on account of the legal uncertainties.
Countries Approach Crypto Differently
Regulators in different countries have taken different approaches to cryptocurrencies.
China banned ICOs in September. Japan licensed cryptocurrency exchanges in April, while South Korea banned anonymous trading accounts in late January.
William Mougayar, a blockchain investor and the author of a book, “The Business Blockchain,” said he hopes the SEC doesn’t classify tokens, since it would be a “slippery slope.” He said it would make more sense to focus on well defined disclosures without being overly restrictive.
ICOs raised more than $5 billion last year alone, according to Autonomous Next. Such offerings, however, hardly exist beyond a whitepaper posting.
SEC Clamping Down
Jay Clayton, chairman of the SEC, has penned an op-ed along with the chairman of the Commodity Futures Trading Commission stating that the SEC is devoting major resources to the ICO market. The commission released an investor bulletin over the summer warning about dangers posed by ICOs.
Gottlieb expects a “hodgepodge of court decisions” to result from the SEC investigation rather than laws or regulations which would require more time to develop. He said the Supreme Court may have to be involved to resolve some questions.
Whether or not an asset is a security is usually guided by the “Howey Test,” based on a 1946 Supreme Court case.
The SEC has sought more information about cryptocurrencies in the last year as the market has drawn billions of dollars. This past Wednesday, The Wall Street Journal reported the SEC has issued scores of subpoenas regarding new digital coins.
Jason Gottlieb, a partner and head of the cryptocurrency litigation team at Morrison Cohen, said SEC offices in New York, Boston and San Francisco has issued subpoenas. Another source confirmed these locations.
Probe Expected To Last A Year
Gottlieb, who is representing PlexCorps, a company facing SEC fraud charges, said the overall SEC investigation will continue throughout the year.
A source claimed about 80 firms have been subpoenaed thus far.
The SEC did not respond to a CNBC request for comment.
The US Securities and Exchange Commission (SEC) has sent requests for information as well as subpoenas to a number of cryptocurrency hedge funds recently. The regulators demanded to know how funds priced investments in cryptocurrencies and about their compliance with client money protection requirements, three sources who asked to remain anonymous told Bloomberg.
Some of the information requests were issued by the SEC Office of Compliance Inspections and Examinations, which can refer its findings to the agency’s enforcement unit if it finds any misconduct. In fact, a number of crypto hedge funds have already received subpoenas from the SEC’s Enforcement Division, which can penalize companies if it decides it is needed. “The SEC has taken a very deliberate approach in this space,” said Peter Van Valkenburgh, director of research at Coin Center, a Washington-based advocacy group. “I think they are just trying to get a handle on the large ecosystem.”
ICOs Are the Target or the Excuse?
The SEC has also requested to know if the hedge funds have properly disclosed any potential conflicts of interest, for example their managers having personal holdings in initial coin offerings (ICOs). And at least one of subpoenas for the hedge funds was specifically about its investment in an ICO. In another case, SEC enforcement attorneys interrogated investment banks about their dealings with token sales. The agency was also apparently concerned with companies using Simple Agreements for Future Tokens(SAFTs) to bypass ICO regulations.
ICOs have been in the sights of the SEC recently and they are supposedly to blame for the agency’s new-found interest in crypto hedge funds. A couple of weeks ago it was revealed that the SEC had issued scores of subpoenas against companies in the field.
Good News From G20 Summit Yesterday
The G20’s announcement that it will pivot away from creating new regulations in favor of examining existing rules gave the cryptocurrency market a much needed seeing Bitcoin surge by $1000.
No New Regulations
The anticipation of what new regulations might come of the G20 meeting this week in Buenos Aires added to a rocky cryptocurrency market over the past week but the news as reported by Reuters is that there will be no new regulation recommendations handed down.
Some of the nervousness of cryptocurrency market watchers coming up to the G20 was due in part to the fact that Mark Carney, Governor of the Bank Of England and outspoken critic of Bitcoin heads the Financial Stability Board which coordinates financial regulation for the Group of 20 economies.
Carney has been very vocal about his doubts concerning the credibility of cryptocurrency in the past speaking as the head of the Bank of England.
Deciding that there was not enough of a consensus to create radical new regulation among the 20 countries that make up the G20 the FSB issued a letter to the central bankers and finance ministers who will convene in Buenos Aries on the 19 and 20 saying
“The FSB’s initial assessment is that crypto-assets do not pose risks to global financial stability at this time,”
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