What has happened?

On the same day last week the North American Securities Administrators Association (NASAA) announced "Operation Cryptosweep", a series of co-ordinated enforcement actions to crack down on cryptocurrency scams, Commodity Futures Trading Commission (CFTC) Chair J. Christopher Giancarlo also revealed that the two organisations had signed an agreement for greater information sharing between federal commodities and state securities regulators.

What does this mean?

Speaking at the NASAA conference in Washington DC, Giancarlo said that the memorandum of understanding (MOU) between the CFTC and NASAA will bolster "co-operative enforcement" and will focus the various agencies’ collective resources to better uphold the law.

Saying that he was making good on the pledge he made when nominated as CFTC chairman to further the collaboration between his organisation and other regulatory agencies, Giancarlo called the MOU a "milestone" in the area of US federal and state financial fraud detection and prosecution.

The MOU is the latest development in what Giancarlo called the "evolving state of regulatory oversight of virtual currency markets".

Giancarlo is known for advocating a balanced approach to regulation in respect of innovation in the financial services industry, one that does not stifle innovation but at the same time stays to mission of rooting out fraud and protecting the public.

"New financial tools are impacting trading, markets and the entire economic landscape with far ranging implications for capital formation and risk transfer. These technologies include machine learning and artificial intelligence, algorithm-based trading, data analytics, 'smart' contracts valuing themselves and calculating payments in real-time and distributed ledger technologies, which over time may come to challenge traditional market infrastructure," he said.

According to the CFTC Chairman, ignoring these changes would be "a profound mistake", as they will not go away.

In his view, the role of regulators is therefore not to fight change but to prepare a regulatory and statutory framework that is "ahead of the curve", prevents and punishes fraud and criminality, gives clarity to emerging technologies and anticipates the evolutions of new instruments such as virtual currencies.

"Our task, as market regulators, is to set and enforce rules that foster innovation while promoting market integrity and confidence," he said.

As to the oversight of virtual currency markets, Giancarlo said that "the interplay" between state and federal laws would be key to ensure a coherent and rationalised approach that "permits market-enhancing innovation to proceed, but that also keeps market integrity and consumer protection top of mind".

At federal level, the CFTC will therefore continue to enforce regulations to ensure the integrity of US swaps and futures markets, also working closely with other federal bodies such as the US Treasury or the Financial Stability Oversight Council, the Securities and Exchange Commission (SEC) and FinCEN.

At state level, local regulators will continue to protect and educate their citizens against "age-old schemes… perpetrated under the cloak of novel technology".

There may also be some overlap between state and federal authority in respect of fraud and misconduct involving virtual currency, as it is critical to have "as many cops on the beat" when it comes to pursuing bad actors that harm consumers in "what is otherwise a promising area of innovation".

With the MOU, Giancarlo believes US regulators have turned "speech into action".

The MOU will establish protocols and procedures for the access, use and confidentiality of information and treatment of non-public information in the course of law enforcement.

Specifically, Giancarlo said that the agreement will create a framework for co-operation that will result in:

  • leveraging of resources to support enforcement actions;
  • enhancing the impact of enforcement efforts and their deterrent effect;
  • encouraging the development of clear, consistent responses to violations of the Commodity Exchange Act;
  • preventing the duplication of efforts; and
  • facilitating vital exchanges of information and communications between the CFTC and state regulators.

"The world is indeed changing, moving into a virtual universe. Language and ideas are being transformed. Distributed ledgers, virtual currencies and other exponential digital technologies are taking us into a new era," Giancarlo concluded.

Hogan Lovells Partner Gregory Lisa, who previously led the Office of Enforcement of Compliance and Enforcement at FinCEN, noted that Chairman Giancarlo’s comments will be generally well received by the industry.

“Of course, some actors in this space may not look forward to the enhanced ability for these agencies – state and federal – to share information, leverage resources, and bring enforcement actions. But most participants in this space are looking to innovate, build, and scale in an environment of certainty and clarity. This is a step in that direction.”

The past week was a busy one for the CFTC and the SEC, as they continue their focus of rooting our fraud from the virtual currency space.

Other noteworthy developments included the SEC launching a fake cryptocurrency website to educate investors about the risks attached to initial coin offerings, while the CFTC released guidance to exchanges and clearinghouses on certain enhancements when listing a derivative contract based on virtual currency.

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