The cryptocurrency landscape is growing. In August of 2021, the total value of all virtual monies was $1.6 trillion. Although the values of each crypto fluctuate, as the world increasingly conducts transactions online, we can expect the cryptocurrency market to continue to proliferate.
Much of the appeal of transacting in cryptocurrencies is that no central intermediary oversees them. Thus, individuals are largely in control of their own virtual money. However, the lack of oversight in this industry has left investors vulnerable to unfair trading practices.
In his speech before the Aspen Security Forum, Gary Gensler, Chair of the U.S. Securities Exchange Commission (SEC), referred to the cryptocurrency arena as the “Wild West,” remarking that investors do not get the information they need to make informed decisions and there are many exchanges with non-registered securities.
Mr. Gensler stated that cryptocurrency might well change the financial landscape. Still, it cannot expect to do so without adhering to the laws and regulations that apply to traditional exchanges. These new technologies dealing in securities fall under the jurisdiction of various federal regulators.
Federal Action Taken Against Cryptocurrency Exchanges
Mr. Gensler’s warning was not far off. Shortly after his remarks, the SEC and Financial Crimes Enforcement Network (FinCEN) announced investigations and actions the agencies have separately taken against cryptocurrency exchanges.
On August 6, 2021, the SEC pursued a case against two Florida men and their company. They were alleged to have sold over $30 million in unregistered securities. The SEC reported that the men offered a “decentralized finance” (DeFi) product, promising investors profits from tangible assets.
However, the product could not deliver as promised. Yet, instead of informing investors of the problem, the men falsely claimed gains from auto loans, which were actually coming from their own funds and another company under their control.
Director of the SEC Enforcement Division, Gurbir S. Grewal, stated that our securities laws require “full and honest disclosure” to protect investors and prevent issuers from engaging in unscrupulous practices.
The Florida men were accused of violating anti-trust laws. They were subject to a cease-and-desist order, disgorgement of over $12 million, and a penalty of $125,000.
Three days later, on August 9, the SEC announced a separate investigation and settlement. This time against a cryptocurrency trading platform.
The SEC alleged that the company acted as a trading platform accessible to U.S. investors. As such, it was required to register as a securities exchange. It did not. Thus, it violated provisions of the Exchange Act. The agency also claimed that the company put profits over compliance with federal regulations.
The company agreed to pay disgorgement of more than $8 million, prejudgment interest of $403,995, and a civil penalty of $1.5 million.
A week after Mr. Gensler’s remarks, FinCEN announced its first action against a futures commission merchant (FCM). The agency claimed that this virtual currency exchange was not only unregistered but also failed to verify customers’ identities and establish an anti-money laundering program. Additionally, none of the 588 suspicious transactions conducted through the company were reported.
FinCEN’s Deputy Director AnnaLou Tirol stated that the company’s actions and inactions “put the U.S. financial system at meaningful risk” by failing to comply with Bank Secrecy Act laws and federal regulations.
The company asserted that it was not doing business with U.S. investors, but FinCEN claimed that it concealed customer records to hide identities.
The company was assessed a $100 million civil penalty.
Obtain Legal Representation
As cryptocurrencies exchanges continue to conduct business, we can expect more action against those accused of violating federal laws and regulations. Because this landscape is so complex and relatively new, ensuring compliance can be difficult, and some companies or individuals might unknowingly commit a violation.
That is why it is necessary to have legal representation for these complicated matters. At Friedman & Nemecek, L.L.C. Attorneys at Law, our Cleveland-based team is well-versed in the issues and laws concerning cryptocurrencies. We handle both criminal and regulatory cases and represent individuals and large companies throughout the nation.
If you are under investigation, retain sound counsel by calling us at (888) 694-4645 or contacting us online.