At the same time, federal legislation being kicked around Washington could have a substantial impact on how cryptocurrencies are treated. A recently issued joint statement from the U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton, Commissioner Kara M. Stein and Commissioner Michael S. Piwowar beckoned caution for investors and endorsed recommendations from the North American Securities Administrators Association (NASAA).
According to information from the SEC, investors should recognize cryptocurrencies lack many characteristics of traditional currencies, such as sovereign backing, and are primarily being promoted as investment opportunities rather than “efficient mediums for exchange.”
“Investors should go beyond the headlines and hype to understand the risks associated with investments in cryptocurrencies, as well as cryptocurrency futures contracts and other financial products where these virtual currencies are linked in some way to the underlying investment,” said Joseph P. Borg, NASAA President and Director of the Alabama Securities Commission.
A survey of securities regulators shows 94% of respondents see a “high risk of fraud” when dealing with cryptocurrencies. Regulators were unanimous in calling for more regulation to provide greater protection for investor, according to information from the NASAA.
“The recent wild price fluctuations and speculation in cryptocurrency-related investments can easily tempt unsuspecting investors to rush into an investment they may not fully understand,” Borg said. "Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility. Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart.”
The SEC statement highlights the NASAA reminder that investors are normally entitled to state and federal securities law protections, and sellers as well as market participants are required to follow these laws. “Unfortunately, it is clear that many promoters of … cryptocurrency-related investment markets are not following these laws,” it reads. “The SEC and state securities regulators are pursuing violations, but we again caution you that, if you lose money, there is a substantial risk that our efforts will not result in a recovery of your investment.”
A recent Senate bill (S.1241), aimed at updating money laundering law, may alter the fundamental pillars that cryptocurrency trading is built upon. Certain provisions of the proposal, though, have met resistance from groups protective of the emerging commodity.
Advocacy group The Bitcoin Foundation opposes potentially defining those “issuing, redeeming, or cashing Bitcoin as a financial institution,” as the bill carries that potential. By labeling actors in the trading of digital currencies as such, they would be required to comply with formal reporting procedures in the same manner as traditional banks.
The Bitcoin Foundation calls that move premature and untenable placing a burden on the budding technology. The foundation takes the position that these digital currencies are not a “financial instrument.”
“At minimum, the Bitcoin Foundation believes that further research and review of this developing and complex area is needed before [anti-money laundering] obligations are applied,” reads a statement from the foundation. “In the event that these provisions are not deleted from the current Bill, the Bitcoin Foundation has proposed amendments and outlined reasons for those amendments.”