August 06, 2018
by Daniel M. Payne

This blog has reported all year on the myriad cryptocurrency investigations being conducted by state and federal government agencies along with national media outlets (e.g. from February; from April; and from May).  The latest investigation comes from the Wall Street Journal, which alleges to have found "175 pump and dump schemes involving 121 different digital coins, which show a sudden rise in price and an equally sudden fall minutes later."  Although the report suggests that "manipulations of cryptocurrencies are no different" than alleged pump and dump schemes in publicly traded stocks, this type of investigation may only be possible in the cryptocurrency market.  Telegram and Discord, which were central to the Journal's methodology, offer go-to crypto-centric platforms, where pump organizers can anonymously execute their plans and capitalize on an unsettled regulatory regime for crypto-trading.  Those or other platforms have yet to be used in an analogous fashion for publicly traded stocks, possibly because of the more robust regulatory regime surrounding traditional exchanges and possibly because of the mania surrounding cryptos.  Thus, the Journal was able to find the kind of pre-litigation corroboration for a pump that generally has not existed for publicly traded stocks.

The report raises some interesting questions:

  • A Wall Street Journal report like this will catch the eye of regulators and prosecutors.  But will regulators and prosecutors prioritize their resources for cryptocurrency traders, especially when pump organizers are currently anonymous?
  • Which regulatory regime applies to cryptocurrency trading (SEC, CFTC, FinCEN, state law, etc.)?  It is still too early to assume that the regulations that apply to exchanges of publicly traded stocks will necessarily apply to cryptocurrency exchanges.  The ultimate answer will depend primarily on how regulators categorize the types of instruments that trade on the exchanges (e.g., securities or commodities). 
  • Will pump organizers and devotees retreat to more private channels of communication to avoid this kind of public scrutiny?
  • What will be the next crypto-related investigation to be announced?  Will 2018 continue as the year of the cryptocurrency investigation?
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Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.