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  • District Court recognizes CFTC authority to regulate virtual currency as commodities


    On March 6, the U.S. District Court for the Eastern District of New York granted the CFTC’s request for preliminary injunction against defendants alleged to have misappropriated investor money through a cryptocurrency trading scam, holding that the CFTC has the authority to regulate virtual currency as commodities. The decision additionally defined virtual currency as a “commodity” within the meaning of the Commodity Exchange Act (CEA) and gave the CFTC jurisdiction to pursue fraudulent activities involving virtual currency even if the fraud does not directly involve the sale of futures or derivative contracts. However, the court noted that the “jurisdictional authority of CFTC to regulate virtual currencies as commodities does not preclude other agencies from exercising their regulatory power when virtual currencies function differently than derivative commodities.” Under the terms of the order, the defendants are restrained and enjoined until further order of the court from participating in fraudulent behavior related to the swap or sale of any commodity, and must, among other things, provide the CFTC with access to business records and a written account of financial documents.

    Find continuing InfoBytes coverage on virtual currency oversight here.

    Fintech Virtual Currency Courts CFTC Cryptocurrency Commodity Exchange Act

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  • Texas State Securities Board issues order halting unregistered cryptocurrency trading operation


    On February 26, the Texas State Securities Board (Board) issued an emergency cease and desist order (order) to an unregistered cryptocurrency trading operation for allegedly targeting investors through fraudulent and materially misleading online advertisements and offering unregistered securities for sale. According to the order, the company purportedly—in addition to intentionally seeking to mislead the public by promoting high-return investment opportunities—failed to disclose risks associated with cryptocurrency mining, promised investors it would comply with “all relevant laws and regulations,” and claimed that its fund directors were regulated by the Cayman Islands. The Board further asserted the company failed to disclose the true identities of its Code of Ethics Association members responsible for “contract law, due diligence and corporate law,” and instead, created the impression it was associated with attorneys and judges, including U.S. Supreme Court Justice Ruth Bader Ginsburg. Under the terms of the order, the company, among other things, is prohibited from engaging in the sale of securities in the state until the security is registered with the SEC or exempt from registration under the Texas Securities Act, and cannot act as a securities dealer until it complies with the same.

    Securities State Issues Cryptocurrency Enforcement SEC Fintech

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  • CFTC offers large reward to “pump-and-dump” scheme whistleblowers


    On February 15, the Commodity Futures Trading Commission (CFTC) issued a Consumer Protection Advisory on virtual currency “pump-and-dump” schemes, which offers eligible whistleblowers between 10 and 30 percent of enforcement actions of $1 million or more, which result from the shared information. The notice cautions consumers against falling for the fraudulent “pump-and-dump” schemes, which capitalize on consumers’ fear of missing the potentially lucrative—yet volatile—cryptocurrency market. The advisory warns consumers that many of the perpetrators of these schemes use social media to promote false news reports and create fake urgency for consumers to buy the cryptocurrency immediately. Then, after the price reaches a certain level, the schemers sell their virtual currency and the price begins to fall.

    Fintech Virtual Currency CFTC Bitcoin Cryptocurrency Whistleblower Enforcement

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  • NYDFS issues policies and procedures reminder to virtual currency companies

    State Issues

    On February 7, the New York Department of Financial Services (NYDFS) issued a guidance document reminding virtual currency entities (VC entities) licensed by the state or chartered as limited purpose trust companies that they are required to have policies and procedures in place to guard against fraud, and that they should be particularly vigilant concerning efforts at market manipulation. The guidance requires VC entities to implement written policies that will (i) identify and assess fraud-related areas of risk, including market manipulation; (ii) provide procedures and controls to protect against identified risks; (iii) allocate risk monitoring responsibilities; (iv) periodically evaluate and revise risk monitoring processes to “ensure continuing effectiveness” and “compliance with all applicable laws and regulations; and (v) “provide for the effective investigation of fraud and other wrongdoing.” NYDFS also requires VC entities to submit incident reports detailing any identified wrongdoing, follow-up reports outlining any material developments, measures taken or to be taken concerning the developments, and a statement outlining any changes to the VC entity’s operations to prevent repeat occurrences.

    State Issues NYDFS Fraud Cryptocurrency Virtual Currency Fintech

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  • Market regulators discuss cryptocurrency oversight gaps during Senate Banking Committee hearing


    On February 6, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled, “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission” to discuss the need for unified measures to close regulatory gaps in the cryptocurrency space. Committee Chairman Mike Crapo, R-Idaho, opened the hearing by briefly discussing the rise in interest in virtual currencies among Americans, as well as investor education and enforcement efforts undertaken by the SEC and the CFTC. Crapo commented that he was interested in learning how regulators plan to safeguard investors. Sen. Sherrod Brown (D-Ohio), ranking member of the Committee, spoke about the importance of pursuing “the unique enforcement of regulatory demands posed by virtual currencies.”

    SEC Chairman Jay Clayton commented in prepared remarks that the SEC does not want to “undermine the fostering of innovation through our capital markets,” but cautioned that there are significant risks for investors when they participate in an entity’s initial coin offering (a method used to raise capital through decentralized autonomous organizations or other forms of distributed ledgers or blockchain technology) or buy and sell cryptocurrency with firms that are not compliant with securities laws. Speaking before the Committee, Clayton stated that the SEC has some oversight power in this space but supported collaborating with Congress and states on new regulations for cryptocurrency firms. “We should all come together, the federal banking regulators, CFTC, the SEC—there are states involved as well—and have a coordinated plan for dealing with the virtual currency trading market,” Clayton stressed.

    In prepared remarks, CFTC Chairman Chris Giancarlo discussed different approaches to regulating distributed ledger technologies and virtual currencies. “‘Do no harm’ was unquestionably the right approach to development of the internet. Similarly, I believe that ‘do no harm’ is the right overarching approach for distributed ledger technology,” Giancarlo said. “Virtual currencies, however, likely require more attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space.” 

    Giancarlo referenced a joint op-ed in which the two chairmen discussed whether the “historic approach to the regulation of currency transactions is appropriate for the cryptocurrency markets,” and offered support for “policy efforts to revisit these frameworks and ensure they are effective and efficient for the digital era.” The chairmen also agreed that the lack of a clear definition for what cryptocurrencies are has contributed to regulatory challenges, but stressed that their agencies would continue to bring enforcement actions against fraudsters. Both the SEC and CFTC have joined a virtual currency working group formed by the Treasury Department—which also includes the Federal Reserve and the Financial Crimes Enforcement Network—to discuss cryptocurrency jurisdiction among the agencies and understand where the gaps exist.

    See here for additional InfoBytes coverage on initial coin offerings and virtual currency.

    Fintech Virtual Currency Cryptocurrency Distributed Ledger SEC CFTC Senate Banking Committee

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  • SEC and CFTC issue joint statement on virtual currency enforcement actions; CFTC files lawsuits alleging cryptocurrency fraud


    On January 19, the SEC and the Commodity Futures Trading Commission (CFTC) issued a joint statement to reiterate the agencies’ positions on virtual currency enforcement and stress that they “will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws.” As previously discussed in InfoBytes last year (see here and here), the SEC determined that federal securities laws apply to anyone who offers and sells securities in the United States, regardless of the manner of distribution or whether dollars or virtual currencies are used to purchase the securities, while the CFTC announced that virtual currencies are commodities. Additionally, both agencies filed enforcement actions in 2017 against firms based upon fraud allegations (coverage available here and here).

    Separately, on January 18, the CFTC filed lawsuits in the U.S. District Court for the Eastern District of New York against two individuals and their companies, alleging commodities law violations and fraud in the cryptocurrency market. In the first complaint, the CFTC alleged that a UK-registered company and its owner solicited cryptocurrency investments from members of the public for a commodity pool, but misrepresented the company’s trading expertise, misappropriated over $1 million of the pool’s funds, and failed to engage in the proposed investments with the pooled funds. In the second complaint, the CFTC alleged that a New York-based company and its owner operated a deceptive and fraudulent scheme in which they solicited cryptocurrency transfers in exchange for virtual currency investment advice and trading guidance, but never actually provided such advice. The CFTC further claimed the company concealed its scheme after collecting customer funds by removing its internet presence and ceasing communications with those customers. The suits seek, among other things, disgorgement of profits, civil monetary penalties, restitution, and a ban on commodities trading for the defendants.

    Fintech Virtual Currency CFTC SEC Enforcement Cryptocurrency

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  • Senate Banking Committee: The impact of cryptocurrency in AML/BSA enforcement

    Financial Crimes

    On January 17, the Senate Committee on Banking, Housing, and Urban Affairs held a second hearing with witnesses from the Treasury and Justice departments to further address the need to modernize and reform the Bank Secrecy Act and anti-money laundering (BSA/AML) regime. The hearing, entitled “Combating Money Laundering and Other Forms of Illicit Finance: Administration Perspectives on Reforming and Strengthening BSA Enforcement,” follows a January 9 hearing before the same Committee on related issues (see previous InfoBytes coverage here). Committee Chairman Mike Crapo, R-Idaho, opened the hearing by stating the need to understand the government’s position on “strengthening enforcement and protecting the integrity of the U.S. financial system in a new technological era,” while also recognizing the challenges technology creates for law enforcement. A primary topic of interest to the Committee was “the rise of cryptocurrencies and their potential to facilitate sanctions evasion and perhaps, other crimes.”

    The first witness, Treasury’s undersecretary for terrorism and financial crimes, Sigal Mandelker (testimony), noted that money laundering related to cryptocurrencies is “an area of high focus” for Treasury, and highlighted actions taken by Treasury’s Financial Crimes Enforcement Network (FinCEN), such as the release of guidance announcing that “virtual currency exchangers and administrators” are subject to regulations under the BSA. Regulated entities, Mandelker stated, are required to file suspicious activity reports (SARs) and are subject to FinCEN and IRS examinations and enforcement actions. Mandelker further commented that Treasury is “aggressively tackling” illicit financing entering the U.S. system and elsewhere, and stressed that other countries face consequences if they fail to have an AML/Combating the Financing of Terrorism regime that meets Treasury standards.

    The second witness, DOJ acting deputy assistant attorney general M. Kendall Day (testimony), informed the Committee of the recent hiring of a digital currency counsel who is responsible for ensuring prosecutors are up-to-date on the latest money-laundering threats in the digital currency field. Day also commented on recent DOJ prosecutions in this space, and emphasized the need for enhanced information sharing for law enforcement, including the benefit of deriving information from SARs.

    Financial Crimes Senate Banking Committee Department of Treasury DOJ Anti-Money Laundering Bank Secrecy Act Fintech Cryptocurrency Virtual Currency FinCEN SARs Enforcement

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  • Senate Banking Committee: Sharpen the focus of AML/BSA enforcement and oversight

    Financial Crimes

    On January 9, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled, “Combating Money Laundering and Other Forms of Illicit Finance: Opportunities to Reform and Strengthen BSA Enforcement” to discuss anti-money laundering and Bank Secrecy Act (AML/BSA) enforcement and compliance. Committee Chairman Mike Crapo (R-Idaho) opened the hearing by stating that Congress and financial regulators must examine and address “decades-old” Bank Secrecy Act and anti-money laundering requirements in order “to sharpen the focus, sustainability and enforcement of a modernized, more efficient U.S. counter-threat-finance architecture.” During the hearing, the Committee stressed the need to move towards a more targeted, strengthened AML framework so that banks, law enforcement, and regulators can focus on specific threats such as the financing of terrorism and sanctions evasions.

    The three witnesses offered numerous insights related to reforming AML/BSA enforcement and regulatory structures, including: (i) establishing an approach that would utilize and track intelligence and analysis rather than focusing primarily on quantifiable metrics; (ii) increasing inter-agency coordination and improving information sharing between financial institutions and regulators, and among financial institutions themselves; (iii) recognizing the importance of law enforcement participation, specifically related to the sharing of suspicious activity reports; (iv) encouraging the participation of entities outside of the banking sector, such as persons involved in real estate or those acting as proxies for financial system access; (v) supporting beneficial ownership legislation for companies formed in the United States; and (v) understanding the ways in which financial institutions are addressing the anonymity of cryptocurrencies and blockchain technology. The witnesses were:

    • Mr. Dennis Lormel, President and CEO, DML Associates and former Chief, FBI Financial Crimes Program (testimony);
    • Mr. Greg Baer, President, The Clearing House Association (testimony); and
    • Ms. Heather Lowe, Legal Counsel and Director of Government Affairs, Global Financial Integrity (testimony).

    Financial Crimes Senate Banking Committee Anti-Money Laundering Bank Secrecy Act SARs Cryptocurrency Virtual Currency Blockchain

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  • SEC Obtains Emergency Court Order Against Canadian Firm for Allegedly Violating Federal Securities Law; Halts Initial Coin Offering


    On December 4, the SEC announced it had obtained an emergency court order to freeze the assets of a Canadian company and the company’s founders (Defendants) and block Defendants’ ability to continue to raise funds through an initial coin offering (ICO). At the time the order was issued, the ICO had raised $15 million since August by “promising investors returns of 1,354% in under 29 days.” This is the first enforcement action taken by the SEC’s recently established Cyber Unit, whose focus includes distributed ledger technology and initial coin offering violations. (See previous InfoBytes Cyber Unit coverage here.)

    According to a complaint filed December 1 in the U.S. District Court for the Eastern District of New York, Defendants allegedly violated the anti-fraud and registration provisions of U.S. federal securities laws by making a series of materially false and misleading statements when marketing and selling securities as digital tokens/cryptocurrencies to obtain investor funds. From August to the present, Defendants purportedly raised $15 million through the ICO, and made false representations including, among other things, that: (i) the firm consisted of large teams of experts across the globe, and (ii) investors would receive certain promised returns (1,354% in less than a month) on investments if all tokens were sold. Further, Defendants allegedly failed to disclose (i) that a portion of the proceeds from the ICO funds would pay personal expenses, and (ii) that the company’s principal executive was “a known recidivist securities law violator in Canada.” The SEC seeks relief in the form of permanent injunctions, monetary penalties and interest, and an “officer-and-director bar and a bar from offering digital securities” against the company’s founders.

    Securities SEC Initial Coin Offerings Enforcement Blockchain Cryptocurrency Fintech Virtual Currency Distributed Ledger

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  • Russia Weighs Risks of Cryptocurrencies; President Putin Seeks Regulations


    On October 10, the First Deputy Governor of Russia’s Central Bank reportedly announced plans to block websites selling bitcoin and other forms of cryptocurrency. Citing unreasonably high risks and the need to protect investors from the “dubious” currencies, the Central Bank’s concerns were echoed by President Vladimir Putin who reportedly stressed that risks associated with the use of cryptocurrencies include money laundering, tax evasion and funding for terrorism. However, President Putin issued a call for cryptocurrency regulation rather than a broad ban and stressed the need to utilize international experience when establishing rules.

    Last September, as previously reported in InfoBytes, several Chinese regulators reportedly announced plans to ban the commercial trading of bitcoin and other cryptocurrencies in the country.

    Fintech Bitcoin Cryptocurrency International Virtual Currency

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