CFTC regulation coming to a cryptocurrency near you

Having exchanged gifts and sang about old acquaintances not forgot the Securities and Exchange Commission (SEC) and the Commodity and Futures Trading Commission (CFTC) are back to bitcoin bustin’.

Last fall’s wild ride frazzled regulators as they searched their bureaucratic souls about whether they are duly protecting investors in this brave new world.

The SEC of course has been at this for a while, having last summer declared the defunct DAO a security and thus under its aegis. And Chairman Jay Clayton recently issued a ‘stern’ warning to market professionals about crypto guidance.

But heretofore, the CFTC rode a more cautious track. The agency didn’t formally recognize bitcoin as a commodity until 2014. It had stated US law does not provide for “direct, comprehensive Federal oversight of underlying Bitcoin or virtual currency spot markets.” Chairman J. Christopher Giancarlo stated the CFTC had “limited statutory authority” over these “largely unregulated markets.” Perhaps market professionals weren’t the only ones sternly talked to.

In a joint op-ed last week, Clayton and Giancarlo declared their agencies will pour abundant resources into crypto regulation. For the SEC that means Initial Coin Offerings (ICOs) are securities regardless of secondary or utility traits.

CFTC-regulated exchanges normally “self-certify” and start trading futures without agency approval. But the agency consulted with two major exchanges before trading bitcoin futures, implementing new rules for greater investment protection. By doing so, the agency declared it now has “clear legal authority” that allows “oversight over the U.S. bitcoin futures market and access to data that can facilitate the detection and pursuit of bad actors in underlying spot markets.”

The CFTC’s epiphany means bitcoin futures are subject to “heightened review” to produce “extensive visibility and monitoring of markets for virtual currency derivatives and underlying settlement rates.” This includes “robust enforcement,” “asserting legal authority,” and “government-wide coordination.”

The CFTC clearly thinks extra scrutiny is needed to catch scammers and ensure market fairness and efficiency. It may be right. Scammers certainly exist and the agency is hunting pilfering confidence men.  

Colorado millennial Dillon Dean bilked over $1 million from 600 investors looking to use his nonexistent “expertise” in binary options contracts. Dean insisted on being in paid in bitcoin. He (allegedly) pocketed the money without making a single trade.  

In Las Vegas, scammers Randall Carter and Mark Gillespie created My Big Coin and perpetuated a years-long scam worth over $6 million. The duo claimed their fake coin was accepted anywhere Master Card was. The money (allegedly) went for “personal expenses and the purchase of luxury goods.”

Lest any East Coasters think they are too sophisticated for such ruses, they aren’t. A New York charlatan took a different track with the same result. Patrick Kerry McDonnell, a self-anointed “cryptocurrency investment expert” created CabbageTech to sell tips, promising at one point 300% returns. But soon after would-be clients gave the cabbage, McDonnell stopped talking. He (allegedly) “misappropriated” the funds.

The interesting question is would CFTC regulation have stopped any of these (alleged) scams a priori? Regulators say the tech boom of the 1990s shows oversight is vital. But the analogy doesn’t quite hold. Disclosure and protections were already there during the tech IPO boom. No one claimed the SEC didn’t have jurisdiction, and the rest followed all the rules yet lots of people gambled and lost. FOMO ruled the day as it does now with bitcoin.

The SEC and CFTC must find the fine line between prosecuting fraud and overburdening innovation.

By Jossey PLLC