SEC Examining Potential Cryptocurrency Concerns

The SEC published a January 18, 2018 letter addressing concerns it has with the recent growth in cryptocurrencies and cryptocurrency-related products. These concerns were raised in the context of the Investment Company Act of 1940, which underlies the financial regulation of mutual funds and exchange traded funds (“ETFs”).  Although the Act is specific to these types of investments—and could not have foreseen the advent of this 21st century technology—certain regulatory principles broadly apply. 

Until recently, initial coin offerings (“ICOs”) have been largely unregulated, but government agencies are changing their approach to cryptocurrencies. Some regulators have even banned the use of ICOs within their countries. The SEC letter addressed concerns arising from these funds regarding valuation, liquidity, custody and arbitrage for ETFs, potential manipulation, and other risks specific to cryptocurrency and cryptocurrency-related products.

Fund managers investing in cryptocurrency and cryptocurrency-related products should be mindful of key risks. The SEC letter stated that until key questions can be satisfactorily addressed, it is not appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products. The letter further states that the SEC has asked sponsors that have registration statements filed for such products to withdraw them until they could address those questions. 

The SEC is also scrutinizing public companies that change their name or business model in a bid to capitalize upon the fervor surrounding blockchain technology. Furthermore, regulators are carefully watching cryptocurrency and little-known as well as larger companies around the globe who have seen their share prices leap in recent months after unveiling plans to enter the cryptocurrency sector or deploy its underlying, distributed-ledger blockchain technology.

The SEC, along with other federal and state regulators as well as criminal authorities, are working together to try and bring transparency and integrity to the markets. As accountants and business advisors, we need to stay current on regulatory guidelines, keep up with the evolving market and technology and, more importantly, effectively mitigate risk for our clients.