Operation Cryptosweep: International Regulators Take Aim at Cryptocurrency Activities

Though they have become a hot topic in the past year, cryptocurrencies still occupy something of an untamed frontier in the financial trading and investment ecosystem — but a coordinated, international effort by regulators to crackdown on deceptive or predatory cryptocurrency activities suggests that this Wild West dynamic may be changing.

On May 21, 2018, the North American Securities Administrators Association (NASAA), an organization of securities regulators dedicated to investor protection, announced it was coordinating an effort by state and Canadian provincial securities regulators to crackdown on potentially deceitful cryptocurrency investment products. Dubbed "Operation Cryptosweep," the effort, which was reported by the Washington Post, comprises nearly 70 inquiries and investigations and 35 pending or completed enforcement actions, some of which allege violations of securities registration or antifraud violations. The state regulators are also pursuing cases of suspicious initial coin offerings (ICOs) that attempt to raise capital in ways that resemble initial public offerings of stock.

The NASAA initiative comes on the heels of public warnings and lawsuits by the U.S. Securities Exchange Commission (SEC), the Federal Trade Commission (FTC), the Commodities Futures Trading Commission (CFTC) and other agencies that have asserted jurisdiction over ICOs and other activities involving cryptocurrencies. A recent Wall Street Journal article found that a high percentage of digital coin offerings it reviewed included “red flags” such as plagiarized investor documents, promises of guaranteed returns, and missing or fake executive teams.

The regulatory crackdown only underscores the need to exercise caution when entering the cryptocurrency marketplace. Clients that wish to pursue cryptocurrency-related business opportunities should conduct careful due diligence, work proactively to stay informed on regulatory issues, and seek advice from competent and qualified counsel. The increased regulatory scrutiny creates additional risks for cryptocurrency trading and investments.