In what has been described by many as the largest coordinated cryptocurrency crackdown to date by state and provincial officials, on Monday during an event hosted by the North American Securities Administrators Association (NASAA), securities regulators across the United States and Canada announced dozens of investigations into potentially fraudulent cryptocurrency investment products. The investigation, dubbed “Operation Cryptosweep”, consists of as many as 70 inquiries and investigations and 35 pending or completed enforcement actions across 44 jurisdictions since the beginning of May. NASAA, an association of state and provincial-level securities regulators in the United States, Mexico and Canada, details previously unannounced enforcement actions and activity by state regulators from Alabama, Colorado, Maryland, Massachusetts, Missouri, New Jersey, North Carolina, Ohio, South Carolina, and Texas. NASAA stated that the probe targeted suspicious initial coin offerings (“ICOs”) and unregistered securities offerings that promise lucrative returns without adequately informing investors of the risks. Many of the pending or completed cases resulted in cease-and-desists letters warning that the unregistered activity violates state securities laws. Regulators noted Monday that they plan to launch additional investigations that may result in additional enforcement actions.
The coordinated effort began in April when a task force comprised of NASAA members was convened to begin a series of investigations into ICOs and cryptocurrency-related investment products. Investigators discovered approximately 30,000 cryptocurrency-related domain names and found many used fake addresses, slick marketing materials, promises of high returns of interest, and unauthorized photos of high-profile individuals in an attempt to add a false sense of legitimacy to their claims.
Joseph Borg, the president of NASAA and director of the Alabama Securities Commission, acknowledged that not all cryptocurrency investment products are fraudulent, but stated that “[w]e’re putting ourselves in the shoes of investors. We’re seeing what’s being promoted to investors. And then we’re taking the next step and then we’re finding out whether they’re complying with securities laws.” Borg noted that “[t]he actions today are just the tip of the iceberg.”
Companies that receive cease-and-desist letters usually have a month to file a response, depending on the jurisdiction, and may have the right to a hearing before the relevant state securities commission and an appeal to a court or administrative law judge. The Washington Post reports that regulators expect many of the sites to shut down voluntarily or change their practice to comply with securities laws after receipt of the cease-and-desist letters.
News of Operation Cryptosweep follows the launch last week by the SEC of a fake ICO website in an effort to increase awareness of fraudulent ICOs. The website, HoweyCoins.com, sets up a bogus coin offering to educate investors about what they should be looking for before they invest in a fraudulent coin offering. Anyone who clicks on the “Buy Coins Now” prompt is instead led to investor education tools and tips from the SEC and other financial regulators.
Although federal agencies like the SEC and CFTC generally dominate the cryptocurrency headlines these days, as we noted back in March, state regulators have become increasingly active in cracking down on unregistered initial coin offerings. In light of Monday’s announcement by NASAA, we expect the number of enforcement actions to continue to rise, providing an important reminder to those in the industry that the possibility of state regulatory action cannot be ignored.