Regulators continue to debate how to define cryptocurrencies, such as bitcoin, and whether they are securities, commodities or properties, etc., which is key to how regulators choose to apply these regulations.
At the National Association of Attorneys General’s recent conference on consumer protection in November 2021, Hester Peirce, Commissioner of the United States Securities and Exchange Commission (SEC), commented on the matter, stating that “the point The view we take these days is that almost everything is security.”
While the public has scrutinized the nebulous and sometimes contradictory statements made by federal regulators regarding the application of cryptocurrency, two recent actions against BlockFi and Celsius – companies that allow consumers to buy, borrow and exchange bitcoin – clearly show that state regulators are taking coordinated action to regulate bitcoin-related investment products and exchanges offering unregistered securities.
The reluctance of state regulators to sit on the sidelines and watch federal authorities decide on the appropriate regulatory regime is consistent with how states have affirmatively led the charge to regulate other emerging Bitcoin-related technologies. State regulators are not looking at bitcoin itself in recent enforcement action, but rather targeting bitcoin-spurred technological innovations.
These studied technologies often involve bitcoin and other cryptocurrencies, which adds to the inherent risk for investors and consumers who invest in bitcoin. Due to bitcoin’s price volatility, legal investigations into emerging technologies may affect bitcoin’s price and thus appear as consumer protection requiring further action by state regulators.
All cryptocurrency players should keep an eye on state policy priorities, as states are clearly monitoring them.
State Regulatory Action Against Bitcoin, Cryptocurrency Projects
In recent years, state regulators — primarily attorneys general and securities regulators — have led the charge in regulating perceived consumer harms. They are acting to fill a perceived void left by the federal government that they deem too slow, legally limited or unwilling to do so on its own, according to the administration. Examples are numerous and include data privacy, e-cigarettes, cannabis, and social media. Likewise, given the lack of comprehensive federal government regulation regarding cryptocurrency, state regulators are actively pursuing the enforcement of interest-bearing cryptocurrency accounts.
Until April 2018, state enforcement of cryptocurrency was relatively minor and focused on solving overt consumer scams. That changed in April 2018, when the North American Securities Administrators Association (NASAA) launched Operation CryptoSweep, where 40 securities regulators across North America organized a working group to share information and coordinate efforts. actions against various cryptocurrency companies trading bitcoin and other virtual currencies.
It’s no coincidence that in the same month, the New York Attorney General launched an investigation into 13 major cryptocurrency platforms, seeking to better understand each company’s internal controls and consumer asset safeguards. .
In just over three and a half years, state securities regulators have issued more than 50 cease-and-desist orders for currency-related investment products, primarily related to initial coin offerings (ICOs) for failure to register and to provide the resulting declarations to investors. These enforcement actions are traditionally brought by a state and have resulted in the voluntary termination of the ICO with fines and promises to no longer offer unregistered ICOs in the future.
The scope of who can be responsible for overseeing the safety and soundness of a cryptocurrency product was expanded in September 2020, when the Massachusetts Attorney General sued payment processor, Stripe, Inc. for allegedly improperly facilitated transactions by persons engaged in the PlexCoin ICO, resulting in the fraudulent and unregistered offer and sale of cryptocurrency. To resolve the claims, in addition to a $120,000 payout, Stripe pledged to improve its risk monitoring procedures.
States Show Coordinated Muscle in Recent Enforcement Actions
Over the past few months, states have moved from individual action to multi-state enforcement actions against two of the biggest cryptocurrency platforms: BlockFi and Celsius Network. Both companies have been accused of offering unregistered securities under the guise of high-interest accounts, allowing investors to use cryptocurrencies such as bitcoin to earn interest at a higher annual percentage yield than traditional banking institutions. Both companies use the accounts to fund their lending and proprietary transactions. The actions stemmed from concerns from state regulators about heightened levels of risk for investors.
Underscoring the seriousness of this expansion of regulatory enforcement, these actions have been coordinated by several states that generally belong to all political walks of life. In July, New Jersey, Texas, Alabama, Vermont, and Kentucky issued cease-and-desist or “show cause” orders against BlockFi. In September, New Jersey, Texas, Alabama and Kentucky joined together again to file similar lawsuits against Celsius. In October, Celsius announced that it had received a request for information from New York.
Notably, New Jersey and Kentucky have issued cease-and-desist orders against BlockFi and Celsius, requiring them to stop offering interest-bearing accounts because they are classified as unregistered securities. New Jersey ordinances classify accounts as offering unregistered securities because the “[i]ninvestor “relinquishes control of the depositary cryptocurrency” and BlockFi and Celsius are “free to use these assets” as they see fit. Accounts are not registered with any state securities regulator or The orders point out that due to the lack of regulatory oversight, these programs appear to pose higher levels of risk to investors.
Harmonized state actions communicated a unified focus on investor protection. In a Sept. 17 press release, New Jersey Acting Attorney General Andrew Bruck said the action was intended to send a broader message: “Financial companies operating in the cryptocurrency market are being warned . If you sell securities in New Jersey, you must comply with New Jersey investor protection laws. Companies that deal in cryptocurrencies are not immune to scrutiny.
Based on past experience, we expect additional enforcement action to be taken against other bitcoin platforms as they use similar business models.
Implications of regulatory measures
One in ten Americans have invested in cryptocurrency this year, and the price of bitcoin hit an all-time high in November 2021. The rise of cryptocurrency also means increased regulatory scrutiny, especially from state regulators who focus on consumer protection. Joint and coordinated action by States is commonplace. State regulators have bi-weekly or monthly calls to discuss the companies they are investigating or the enforcement actions they are taking. It would be unwise to think that the 46 state regulators who have not taken action against BlockFi and Celsius are not paying close attention to these actions.
Yet each of these regulators is a separate sovereign. Even when four or five sovereign entities take coordinated action, each action must be consistent with each state’s goals and priorities. Observers should not make the mistake of thinking that coordinated action equals a common view on all issues, even within a single industry.
One thing is clear, however: when states share a common goal of consumer protection and are united in the belief that a particular action will achieve that goal, states will not hesitate to act in a coordinated fashion down the aisle to target alleged offenders. For this reason, we are likely to see continued coordinated enforcement action by states to regulate perceived violations of existing national laws.
This is a guest post by Stephen Piepgrass, James Stevens, Chris Carlson, and Namrata Kang. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.