The virtual currency market continues to grow, and this growth has fueled increased attention from retail investors and financial regulators. Financial institutions active in the virtual currency market have seen a trend towards increased regulatory oversight and the latest development imposes new client disclosure requirements upon certain companies.
The Securities and Exchange Commission (SEC) obtained a court order freezing more than $27 million in proceeds from alleged illegal distributions and sales of restricted shares of a public company , and charged the company, its CEO, and three other affiliated individuals on April 6, 2018. That same day, the Nasdaq Stock Market halted trading in the company’s stock.
The SEC’s complaint alleges that shortly after the company began trading on the Nasdaq Stock Market and announced the acquisition of a purported blockchain-empowered cryptocurrency business, its stock price rose dramatically until its market capitalization exceeded $3 billion. The SEC further alleges that the CEO and the three other individual defendants then illegally sold large blocks of their restricted shares to the public while the stock price was excessively elevated and that they collectively reaped more than $27 million in profits.
Recent activity by the FTC in court continues to indicate that federal regulators are prepared to take a strong stance on deceptive practices related to cryptocurrency.
In a complaint, filed on February 20, 2018, the FTC alleges that Thomas Dluca, Louis Gatto, and Eric Pinkston engaged in unfair or deceptive business practice, and misrepresented material facts, associated with businesses known as the “Bitcoin Funding Team,” “My7Network,” and “Jetcoin.”
A recent flurry of activity by the Securities and Exchange Commission (SEC) in court, and strong talk on the Hill, gives a clear indication that the U.S. regulatory agency is making a significant push to rein in the current wild-west atmosphere of investments in Blockchain and cryptocurrency companies.
In the wake of the DAO Report issued by the SEC in July 2017, the agency released several Investor Alerts to warn the public of the risks associated with investing in initial coin offerings (ICOs), including an alert to warn investors to be careful about advertisements by celebrities promoting ICOs and other Blockchain-related investments. Moreover, the SEC chairman and his counterpart at the Commodity Futures Trading Commission (CFTC) have recently released statements and op-eds and appeared before the U.S. Senate Banking Committee to elevate the awareness of lawmakers and the public of some of these risks.
On January 25, 2018, the National Institute of Standards and Technology (NIST) division of the U.S. Department of Commerce released a draft report of Blockchain technology (Overview). Recognizing the growing public awareness of the most well-known application of Blockchain technology – Bitcoin, the Overview draft report provides a high-level discussion of the technical components of Blockchain technology, addressing how data is encrypted, and how the data is verified and then distributed among the participating Blockchain parties. NIST is seeking comments on the scope and completeness of the draft Overview, which are due by February 23, 2018.
The Overview begins with a fairly detailed, yet accessible, overview of the architecture of Blockchain technology, covering both how data that is to be recorded and encrypted in the blocks, and how the individual blocks are then incorporated into the corresponding Blockchain. Discussions of hashing, nonces, forking and Merkle Trees are included, along with helpful charts for those with a preference for visuals.