By Amanda Maine, J.D.
The Practising Law Institute recently hosted a virtual conference on enforcement priorities in 2020. Enforcement Officials from the CFTC and the SEC participated in a panel discussion about the evolution of enforcement actions relating to cryptocurrency and digital assets. Mark Rasmussen of Jones Day, who moderated the cryptocurrency panel, noted that a few years ago, federal regulators were bringing “bright-line” enforcement actions relating to cryptocurrencies that involved clear-cut bad actors. He added that more nuanced cases have arisen since then and that regulators now have precedents on their side.
CFTC. K. Brent Tomer, chief trial attorney at the CFTC, agreed with Rasmussen’s assessment about the evolution of cryptocurrency enforcement and stated that level of sophistication regarding cryptocurrencies has grown with both fraudsters and with the CFTC. Compared to five years ago, there is more case law and clarity regarding cryptocurrency cases. Tomer acknowledged that it has been a process but expressed that if the CFTC had rushed crypto-related charges right off the bat, there would have been a backlash.
Tomer said that sometimes it is good to start off slow, pointing to the CFTC’s 2015 action against Coinflip. In that proceeding, the CFTC determined that bitcoin and other virtual currencies are commodities under the Commodity Exchange Act (CEA). However, he noted that the CFTC did not impose a fine on Coinflip, and instead settled for a cease-and-desist order. The CFTC continued its enforcement efforts, including against Hong Kong-based bitcoin exchange Bitfinex in 2016. In that case, Bitfinex was ordered to pay a $75,000 penalty for violations of the CEA.
Another feather in the CFTC’s crypto-cap came in 2018, when a federal court ruled that the CFTC does have jurisdiction and enforcement authority over virtual currency scams because they are commodities under the CEA, Tomer said. He added that the CFTC will continue to pursue these cases, even as they become increasingly sophisticated.
SEC. There has been a similar evolution in SEC enforcement efforts against initial coin offerings (ICOs) at the SEC, according to John Enright, assistant director at the SEC’s Cyber Unit in its New York regional office. He pointed to a one of the SEC’s early ICO enforcement actions brought against RECcoin Group, which had sold tokens purportedly backed by diamonds and investments in real estate. The SEC froze the assets of the companies and their founder, who eventually ended up pleading guilty to federal securities fraud charges for his role in the scheme.
The SEC has also brought charges against several entities for registration violations under Securities Act Section 5 for their initial coin offerings, Enright said, citing the Commission’s enforcement actions against Munchee, AirFox, and Paragon. In addition, the Division has charged several entities with token-related fraud, he said. The case against Veritaseum and its founder is a case that stands out as the first crypto case where the SEC alleged a manipulation charge under Exchange Act Section 9(a), Enright noted.
The SEC’s Enforcement Division has recently been active in halting the delivery of tokens by Telegram Group, Rasmussen said, a somewhat different type of virtual currency case. Telegram raised $1.7 billion to launch a blockchain for hosting new cryptocurrencies and decentralized applications from 170 initial purchasers via agreements for the purchase of digital asset securities, which it called Grams. The SEC sought and obtained a temporary restraining order against delivery of the Grams, alleging that they were securities being sold in violation of the registration provisions of the Securities Act and that the initial purchasers are underwriters who will engage in a distribution of Grams into a public market lacking the information that would be provided in a registration statement. In March, Judge Castel in the Southern District of New York granted the SEC’s request for a preliminary injunction against Telegram.
Rasmussen noted that the SEC’s case against Telegram was not a typical ICO case for the SEC because it was not a “straight to the public” ICO; instead, it was a Regulation D offering through a purchase agreement to be followed-on by Grams, resulting in nuances that were not present in some of the SEC’s earlier ICO cases. Enright agreed, remarking that one thrust of Telegram’s argument was that the Grams were not marketed to retail investors, but rather very sophisticated institutional investors, as well as venture capital and private equity firms.