Crypto-World Regulatory Update

23 January 2018


A day without a regulatory crypto-world update is like a January day in the Midwest without snow and mud. The Commodity Futures Trading Commission (CFTC) and the Securities & Exchange Commission (SEC) have kept us well-informed by dropping puzzle pieces along the way to viewing the full and complete picture of the regulatory crypto-world.

Late last week, the CFTC filed two enforcement actions on January 19, 2018, against: (i) CabbageTech Corp and Patrick McDonnell (Cabbage), and (ii) The Entrepreneurs Headquarters Limited and Dillion Dean (Dean). In the Cabbage matter, the CFTC alleged that the defendant unlawfully solicited customers to send money and crypto-currencies to receive advice and discretionary trading by Cabbage. However, the CFTC alleged that Cabbage ‘took the money and ran’ (that’s not the technical terminology used by the CFTC, but is essentially what the CFTC said). As such, while this matter is within the realm of the crypto-world, it is an old-fashioned lie combined with misappropriation of another’s money.

The other action, Dean, involved a purported Ponzi scheme in which Dean solicited money to pool in a fund to trade futures, such as binary options. It turns out that, like Cabbage, Dean also took the money and ran, but also in typical Madoff-like Ponzi-fashion, Dean paid the initial investors with money received from newer investors (and kept some money for himself). While the CFTC alleged fraud and misappropriation against Dean, it also alleged that Dean should have registered as a Commodity Pool and/or as a Commodity Trading Advisor (which was not done).

The SEC also had a few things to say on the crypto-world last week. Of most significance, the Division of Investment Management within the SEC issued a letter stating that, as of now, it was not appropriate for investment fund sponsors to seek registration of SEC-regulated funds that “invest substantially in cryptocurrency and related products.” So, for the moment, the SEC does not want to see Bitcoin or any other cryptocurrency in, for example, a mutual fund. That said, money managers are still allowed to create ‘crypto’ funds consisting of public companies that are doing work in the crypto and Blockchain-worlds, such as Overstock, IBM, Apple, etc.

Lastly, the Enforcement Heads for the CFTC and the SEC came together late last week to issue a statement that succinctly cautions investors and entrepreneurs in the crypto-world, as such:

When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws.

The Divisions of Enforcement for the SEC and CFTC will continue to address violations and to bring actions to stop and prevent fraud in the offer and sale of digital instruments.


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