Articles Posted in Cryptocurrency

Cryptocurrency proponents tout the technology’s potentially “transformative” nature and its position as an arguably more stable store of value when compared with fiat money. [1] Yet SEC Chairman Gary Gensler cautioned crypto investors against an overly rosy view of the technology during a speech at the Penn Law Capital Markets Association Annual Conference this week. Instead, Gensler advocated for investor caution, along with a much broader regulatory and enforcement role for the SEC in cryptocurrency markets. [2]

Before sharing his view of the SEC’s role in crypto markets, Chairman Gensler first compared the technology to that of the dotcom bubble in 2000 and subprime lenders leading up to the 2008 financial crisis. His message: the flurry of attention on crypto and related innovations does little to vouch for its long-term viability or success. Instead, as was borne out in 2000 and again in 2008, cryptocurrency could indeed be a technology destined for failure.

The SEC’s role then, in Gensler’s view, is to protect investors from the potential financial blowback of such a failure. While Gensler lauded the spirit of entrepreneurship common in the United States, he also argued that the SEC should approach crypto regulation in a “technology neutral” way. In so doing, the SEC could carry out their mission to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets, while still allowing crypto markets to flourish.

As 2021 draws to a close, it is a fitting time to revisit some of the main enforcement actions taken by the Securities and Exchange Commission (SEC) through fiscal year (FY) 2021, which ended on September 30th, 2021.

In total, the number of new enforcement actions filed by the SEC in FY 2021 increased by 7% over the previous year, with 434 new enforcement actions. While the total number of enforcement actions – including new actions along with other “follow-on” or open proceedings  – decreased slightly year over year in FY 2021, the SEC remained committed to its role as “cop on the beat for America’s securities laws,” as described by Chair Gary Gensler. [1] The SEC maintained a sharp focus on protecting the integrity of the country’s capital markets through enforcement actions against bad actors even in the face of the persisting COVID-19 pandemic persisted.

In announcing its progress on enforcement actions during FY 2021, the SEC concentrated on several key priority areas. Some of these priority areas, per a recent SEC Press Release, included “holding individuals accountable,” “ensuring gatekeepers live up to their obligations,” “rooting out misconduct in crypto,” “policing financial fraud and issuer disclosure,” “cracking down on insider trading and market manipulation,” and “swiftly acting to protect investors.” [1]

In the span of the last two months, a digital piece of art sold for nearly $70 million, Jack Dorsey, CEO of Twitter, sold his first tweet for $2.8 million, and a digital Lebron James basketball card went for $208,000. What do these three massive sales have in common? Each transaction was for a non-fungible token (NFT), and together, they signal rapidly growing interest in the cryptographic asset marketplace.

Starting with the basics, what is a non-fungible token?

An NFT is a type of digital, cryptographic asset which exists on blockchain. Fungibility refers to interchangeability – assets like dollars, gold, and even Bitcoin, are fungible, because each unit is worth the exact same amount, and is thus readily interchangeable. On the other hand, each unit of a non-fungible asset has its own unique value and thus is not readily interchangeable – think of assets like property, artwork, and other collectibles. [1]

As they begin to move into the mainstream, it has become clear that cryptocurrencies pose a unique set of regulatory and legal challenges for investors and regulation agencies alike. In the past week alone, two high-profile securities fraud cases tied to cryptocurrency have come to light, and the total number of enforcement actions by the SEC on similar schemes has risen sharply over the past five years. In 2016, the SEC filed only one “Digital Assets/Initial Coin Offerings” enforcement action – in 2020, they filed 23.

The first cryptocurrency, Bitcoin, was introduced in 2009, and it has since been joined by over 1,900 competitors. Cryptocurrencies operate in a decentralized, purely digital block-chain network. Within the network, a supply cap on “coins” exists, and coin production is left in the hands of collective members of the system through a process known as “mining.” In Bitcoin’s case, there can only ever be 21 million coins mined, of which over 18 million have been mined thus far. Cryptocurrencies like Bitcoin derive their value largely from their limited supply, overall market demand, the cost to produce a bitcoin via mining, and competition from other cryptocurrencies.

Recently, Bitcoin’s price has been on the rise, stirring up a good deal of interest from prospective investors. As of February 6, 2021, one bitcoin is worth $39,255.90 –up about 300% year over year, and 34% year to date. But an investment in Bitcoin, or other cryptocurrencies like it, is unique in its risks. Experts caution that because cryptocurrency is a relatively new technology, and is not yet well understood by the public, prospective investors are at an increased risk of falling victim to fraudulent schemes.

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