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CFTC – Err on the Side of Caution

Bitcoin and Blockchain, Finance and Securities

The Commodity Futures Trading Commission aims to “foster open, transparent, competitive, and financially sound markets” by ensuring the derivatives markets is free from fraud and manipulation.[1] The CFTC notices the significant impact of cryptocurrencies on the market, especially in light of bitcoin’s popularity, however the Commission is wary of the lack of enforcement as it announced the third case of fraud within a week.

On January 24, 2018 the CFTC discovered that the cryptocurrency known as “My Big Coin” from My Big Coin Pay Inc., founded by Randall Carter and Mark Gillespie, fraudulently induced 28 people to invest a total of $6 million. What did Carter and Gillespie do with the funds from My Big Coin? Law360 reports they used the funds for “shopping sprees and [to] pay off earlier investors.”[2] The lack of regulation coupled with the public’s eagerness to purchase cryptocurrencies has created unprotected gaps in the market leaving investors vulnerable to fraud. Fraudulent market participants are capitalizing on the hype of bitcoin by creating their own “coins” and advertising false promises to potential consumers.  Carter and Gillespie assured investors that their cryptocurrency was “widely accepted as MasterCard, that it was back by gold and that there was a genuine market for it”.[3] Unfortunately for the 28 investors, these allegations were false. Chief James McDonald of the CFTC stated: “The CFTC is actively policing the virtual currency markets and will vigorously enforce the anti-fraud provisions of the Commodity Exchange Act”.[4]

What is in store for the future of cryptocurrency and blockchain technology regulation? The Securities and Exchange Commission and CFTC stated: “A key issue before market regulators is whether our historic approach to the regulation of currency transactions is appropriate for the cryptocurrency markets.”[5] Technological advancements create the potential for investors to drive the market. Regulations need to be set in place as currently market participants are increasingly vulnerable to fraud and manipulation. However, current policies were not created to regulate such technological practices such as cryptocurrency exchanges and blockchain technology. The law and regulations are living instruments – they are designed to be challenged and restructured in light of new obstacles. It is imperative that agencies implement new policies that truly reflect the needs of the market.

Tips for investors to avoid cryptocurrency fraud:

  • Consult the CFTC and SEC websites. Both Commissions provide a series of guidelines and notes on what to look out for.
  • Do your due diligence! Research the cryptocurrency and ensure it is being traded on a bona fide platform. Ask: Is the product and offering legal? Can I sell when I want to? Does the product comply with existing fintech regulations?
  • Speak to your financial advisor to understand the inherent risks.

[1] U.S. Commodity Futures Trading Commission. “Mission and Responsibilities.” Available at: http://www.cftc.gov/About/MissionResponsibilities/index.htm. Accessed on Jan. 25, 2018.

[2] Newsham, Jack. (Jan. 24, 2018). “CFTC Announces 3rd Cryptocurrency Fraud Suit in 1 Week.” Law360. Available at: https://www.law360.com/securities/articles/1005164/cftc-announces-3rd-cryptocurrency-fraud-suit-in-1-week. Accessed on Jan. 25, 2018.

[3] Ib.

[4] Ib.

[5] SEC. (Jan. 25, 2018) “Statements by SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo: Regulators are Looking at Cryptocurrency.” SEC. Available at: https://www.sec.gov/news/public-statement/statement-clayton-giancarlo-012518. Accessed on Jan. 25, 2018.

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