May 22, 2018
by Daniel M. Payne

Investigations into the cryptocurrency market are mounting.  Journalists and state regulators are the latest to announce investigations.  An in-depth investigative journalism piece aimed at red flags in the ICO market was released last week, while this week saw the announcement of a regulatory enforcement sweep by state regulators.  These follow on the heels of last month's SEC’s cryptocurrency sweep and New York’s Virtual Markets Integrity Initiative,

On May 17, the Wall Street Journal published the results of its investigation into 1,450 ICOs , finding hundreds of red flags for fraud among the offerings.  Although it researched ICOs as far back as 2014, the Journal reported that most ICOs, including most of the ICOs with red flags, were launched in 2017 or 2018.  The Journal found ICO white papers that copied text verbatim from other white papers regarding marketing plans, security issues, and technical features.  The Journal also found ICOs with fake team members, no website, and guaranteed returns in the promotional materials.  It is unclear how many, if any, of the ICOs had registered with the SEC or claimed an exemption from registration.

Four days after the Journal report, the North American Securities Administrators Association announced “Operation Crypto-Sweep.”  The sweep is a coordinated series of investigations and enforcement actions brought by state and provincial regulators in the U.S. and Canada and targeting ICOs and cryptocurrency-related investment products.  A NASAA task force is coordinating the sweep.  Although the task force was only assembled in April, the sweep has resulted in 70 inquiries or investigations and 35 pending or completed enforcement actions.  SEC Chairman Jay Clayton issued a statement on May 22 applauding NASAA for the sweep.

These investigations and enforcement actions “are just the tip of the iceberg,” according to NASAA President Joseph Borg, and are expected to continue this year.  Indeed, the same day it announced the crypto-sweep, NASAA announced it signed a Memorandum of Understanding with the CFTC.  The MOU is "intended to provide a framework for the sharing of confidential information between the CFTC and state securities regulators in the United States," and is designed to generate enforcement actions.  Cryptocurrencies would be a natural area for the two organizations to partner given their recent focus on the industry.

About Blockchain Law Center

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.