The Securities and Exchange Commission (SEC)
The Securities and Exchange Commission did not give any official comments regarding cryptocurrencies (namely, Bitcoin) for quite a long time. In 2014 SEC only warned the US citizens that Bitcoin is a very risky investment and there is a lot of fraud around its topic.
“The rise of Bitcoin and other virtual and digital currencies creates new concerns for investors. A new product, technology, or innovation – such as Bitcoin – has the potential to give rise both to frauds and high-risk investment opportunities. Potential investors can be easily enticed with the promise of high returns in a new investment space and also may be less skeptical when assessing something novel, new and cutting-edge.
We previously issued an Investor Alert about the use of Bitcoin in the context of a Ponzi scheme. The Financial Industry Regulatory Authority (FINRA) also recently issued an Investor Alert cautioning investors about the risks of buying and using digital currency such as Bitcoin. In addition, the North American Securities Administrators Association (NASAA) included digital currency on its list of the top 10 threats to investors for 2013”.
In 2016 the Securities and Exchange Commission has made a research of DAO. “DAO” is a name of an initial coin offering, which was tragically hacked in 2015. More than $ 50 000 000 worth of ETH tokens (12 000 000 Eher) was stolen. DAO is one of the most famous case of an ICO being hacked.
The SEC representatives noted that:
“The DAO is one example of a Decentralized Autonomous Organization, which is a term used to describe a “virtual” organization embodied in computer code and executed on a distributed ledger or blockchain”.
SEC’s primary goal was to find out whether the DAO tokens can be considered as a security. In order to come to a conclusion, the Securities and Exchange Commission applied the USA investment contracts examination, applied by the U.S. Supreme Court in SEC v WJ Howey Co. After the exhaustive examination of all circumstances the SEC came to the conclusion that DAO tokens were securities. An investment contract is “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”.
In is important to note that the Securities and Exchange Commission has mainly focused on Initial Coin Offerings. Bitcoin does not have many similarities with modern tokens issued by a blockchain-based start-up which is running a token sale. Thus, the SEC investigation touches upon the ICO sector and impacts new altcoins (or tokens). There is no single opinion on whether Bitcoin is a security: the decision will be made based on a particular transaction. However, every blockchain-based company or platform, which is running a trading business (buying / selling Bitcoin or other cryptocurrencies) should be officially approved by the SEC as an exchange, broker/dealer, or Alternative Trading System (ATS).
Financial Crimes Enforcement Network (FinCEN)
Recently FinCEN has published an official statement on “virtual currency” (cryptocurrency), which the cryptocurrency is recognized as a “medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency”. The regulatory body has concluded that Bitcoin and some other convertible cryptocurrencies can be used as an alternative to a real money.
“We will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate U.S. anti-money laundering laws,” said Jamal El-Hindi, Acting Director for FinCEN. “This action should be a strong deterrent to anyone who thinks that they can facilitate ransomware, dark net drug sales, or conduct other illicit activity using encrypted virtual currency. Treasury’s FinCEN team and our law enforcement partners will work with foreign counterparts across the globe to appropriately oversee virtual currency exchangers and administrators who attempt to subvert U.S. law and avoid complying with U.S. AML safeguards.”. It is also important to note that the members of cryptocurrency community who are using BTC as a payment method for goods, products or services (“users”) are not subject to Money Serving Business (MSB) restrictions, because such cryptocurrencies are not MSB. One does not need to make any reports or register within the aforementioned authority.
At the same time, those members of the Bitcoin community, who own Bitcoin trading platforms, use Bitcoin circulation for business purposes (“administrators’” or “exchangers”) should be considered as a subject to FinCEN’s restrictions and comply with them. FinCEN started imposing penalties on foreign-based MSB which are illegally operating in the USA. For example, one of the most popular cryptocurrency exchanges BTC-e had to pay a £ 110 000 000 penalty. One of the exchange’s owners was also arrested.
“FinCEN acted in coordination with law enforcement’s seizure of BTC-e and Vinnik’s arrest. The Internal Revenue Service-Criminal Investigation Division, Federal Bureau of Investigation, United States Secret Service, and Homeland Security Investigations conducted the criminal investigation.”
Commodity Futures Trading Commission (CFTC)
The Commodity Futures Trading Commission works with financial derivatives. In the beginning of 2014 a CFTC representative commented that Bitcoin can be considered as a commodity. The agency has published a primer, in which it makes an overview of a virtual currency (cryptocurrency), describes the potential of using the blockchain technology in a real life environment, explains the role and history of the Commodity Futures Trading Commission and talks about the risks of virtual currencies. The strict regulations effected the cryptocurrency market (Bitcoin value decreased by 8 %).
“There is no inconsistency between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances. − The CFTC looks beyond form and considers the actual substance and purpose of an activity when applying the federal commodities laws and CFTC regulations. Virtual currencies are relatively unproven and may not perform as expected (for example, some have questioned whether public distributed ledgers are in fact immutable).”