What’s ahead for the crypto space in 2019? More clarity, but also more guidance and stiffer fraud penalties, regulators and legal experts predict.
Digital assets and initial coin offerings (ICOs) will occupy a “significant” amount of the Securities and Exchange Commission’s time in 2019, Jay Clayton, the agency’s chairman, said during recent comments in which he laid out his regulatory priorities for next year.
ICOs, Clayton said, “can be effective ways for entrepreneurs and others to raise capital,” but “the novel technological nature of an ICO does not change the fundamental point that, when a security is being offered,” securities laws must be followed.
Pointing to the agency’s new Strategic Hub for Innovation and Financial Technology (FinHub), Clayton said the SEC’s “door remains open to those who seek to innovate and raise capital in accordance with the law.”
Joseph Mencher, a partner in the Intellectual Property and Social Media Practice Groups at Haynes and Boone LLP in Austin, told ThinkAdvisor in an email that in 2019, he expects regulatory changes “that continue to signal increased governmental acceptance of the use of cryptocurrencies, similar to the state of Ohio beginning to accept state taxes in Bitcoin in 2018.”
That being said, Mencher sees further regulation coming from the states, similar to New York’s Bitlicense, as well as new regulations “that greatly limit how initial coin offerings are performed, along with the associated enforcement of current (and future) laws with respect to ICO activities that were conducted in 2017 and 2018.”
He noted the SEC’s Nov. 16 action, in which the agency required Airfox coin and Paragon coin to “pay back their investors.”
The SEC, Mencher said, is likely “in the process” of developing ICO regulations.
That said, Mencher anticipates that the cryptocurrency space will “continue to develop at a rapid pace, with possible ETF approval” by the SEC.
More CFTC Guidance Likely on Virtual Currencies as Commodities
Michael Philipp, partner at Morgan Lewis who counsels financial services clients in futures and securities transactions, told ThinkAdvisor in an email that “courts and regulators are playing catch-up when it comes to cryptocurrencies, and to interpreting existing laws and regulations as applied to these new and innovative [digital asset] offerings.”
One important question is whether virtual currencies are “commodities” within the meaning of the Commodity Exchange Act and subject to regulation by the Commodity Futures Trading Commission, he said.
He noted the Sept. 26 ruling by a U.S. district court in Massachusetts, “which held that a virtual currency My Big Coin is a commodity within the meaning of the CEA and is therefore subject to the anti-fraud authority of the CFTC, even though there currently is no futures contract on My Big Coin.”
The My Big Coin decision, however, “does not mean that all crypto-assets are necessarily commodities,” Philipp said.
The CFTC, he said, “takes the position that for the purposes of the commodity definition, virtual currency means ‘a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value, but does not have legal tender status in any jurisdiction,’” he explained.
“It may be that not all crypto-assets are commodities, but only those that satisfy one of the CFTC’s functional descriptions of virtual currency,” he continued, adding that he expects to see more guidance on this in 2019.
Penalties for Crypto Fraud to ‘Grow More Severe’
Clyde Tinnen, a partner on the corporate team of international law firm Withers, told ThinkAdvisor in a separate Tuesday email that the “very tumultuous year for the cryptocurrency space” in 2018 will continue next year, with cryptocurrency values continuing “to face significant headwinds and struggle.”
While 2018 started out “with record highs in values of cryptocurrencies and large-scale ICOs raising millions of dollars, the year “has ended with cryptocurrency values plunging and regulatory enforcement actions,” he said.
SEC actions “for fraud and failure to comply with securities laws will continue,” Tinnen said, while “penalties for fraud will likely grow more severe.”
Penalties for noncompliant ICOs “will likely continue to be fines plus the mandatory offer of rescission rights to all participating investors,” he continued.
Continued regulatory pressure will also be placed on investment advisors, brokers and other financial intermediaries “to comply with fiduciary and regulatory obligations in the crypto space,” Tinnen added.
Also, IRS enforcement “for the underpayment of taxes related to crypto assets will likely increase next year,” Tinnen opined.