Stay up-to-date with the latest developments in securities law through access to both news and all statutes and regulations. Find relevant corporate filings through a searchable EDGAR database. And...
An emergency cease-and-desist-order filed by the Texas State Securities Board against U.K.-based BitConnect is the latest sign more enforcement actions are on the way against cryptocurrencies at both the federal and state level.
The order filed Jan. 4 halting the company’s Jan. 9 initial coin offering came the same day that multiple state securities regulators advised the public to “go beyond the headlines and hype” of cryptocurrencies and fully understand the potential risks.
“The Texas State Securities Board action is consistent with the recent and heightened interest in cryptocurrency activities shown by regulators more broadly. We are likely seeing the beginning of a trend in increased scrutiny — and enforcement action — in this area by state and federal regulators,” Jai R. Massari, a partner at Davis Polk & Wardwell LLP, told Bloomberg Law.
Enforcement actions are likely to focus on ICOs, Michael Selig, at attorney with Reed Smith LLP, told Bloomberg Law. “Up until this point we’ve had civil litigation at federal courts” and some federal enforcement actions, but states haven’t been very active in enforcement of cryptocurrencies outside the realm of money transmission, Selig said.
That could all be about to change as securities regulators across the country sent up warning shots Jan. 4 to investors and companies.
The order in Texas came hours after an organization representing state securities agencies cautioned investors looking into cryptocurrency investments. The statement from the North American Securities Administrators Association quickly attracted bipartisan praise from Securities and Exchange Commission members.
NASAA found that 94 percent of state and Canadian provincial securities regulators fear a “high risk of fraud” concerning cryptocurrencies. The regulators also agreed that more cryptocurrency regulation is needed to ensure investor protection, according to NASAA.
“Yesterday’s action by state securities regulators in Texas is representative of the strong enforcement role of NASAA members and is reflective of increased regulatory scrutiny of cryptocurrency-related investment products,” Bob Webster, a spokesman for the organization, told Bloomberg Law.
The Texas securities regulator alleged BitConnect was engaged in multiple activities that violated Texas securities laws, constituted fraud, or misled investors. The company failed to register with the state to sell securities, and likewise failed to register the agents it recruited to sell its products, according to the order.On its website, BitConnect promises investors up to 120 percent annual returns on their investments. The ICO proposed to accept bitcoins, currently valued at approximately $16,000 per coin, in exchange for BitConnect coins. The company values its market cap at $4.1 billion based on the value of all BitConnect Coins currently issued.BitConnect didn’t immediately respond to a request for comment.
While some in the cryptocurrency trading community have long viewed BitConnect as a potential Ponzi scheme, the company has an active and avid fan base. Texas-based users who try to work around the ban on the company could open themselves to potential legal issues, Selig said.
“The order said BitConnect Coins are securities. Persons that own them and are trading them have to comply with the state securities laws as well,” Selig said. For example, BitConnect Coin users who try to reroute their internet protocol (IP) addresses to avoid looking like ones registered in Texas could be violating securities laws. However, it’s unclear how the state might handle that situation, and the bulk of securities law compliance falls on BitConnect to prevent Texans from accessing its platform, Selig said.
While the force of the order stops at Texas’ borders, its symbolism is further-reaching. “The SEC is unlikely to say these aren’t securities” and overturn the order, Selig said.
Tokens offered through an ICO that relate to precious metals or energy could also come under scrutiny by other state-based regulators, Selig said.
Exchanges that list BitConnect Coins may begin also delisting or halt trading for U.S.-based users, Selig said. “The exchanges would be silly not to consider the implications of state law persuading the SEC to consider these to be securities as well,” he said.
To contact the editor responsible for this story: Michael Ferullo at email@example.com
Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)