Virtual Currencies 101
Contact: Daniel D. Hill
For too long I have failed (arguably intentionally) to wrap my head around virtual currencies like Bitcoin, cryptocurrencies and initial coin offerings (“ICOs”). Frankly I still recall needing a real, tangible dime to make a call at a pay phone. Time marches on though with or without us. Refusing – for now – to get left behind, it is time to understand these newfangled products and technologies, and how they fit into our current regulatory schemes.
Financial regulators have been more diligent than me in this area. In short, it is well established that virtual currencies are – not surprisingly – subject to financial regulations. They are considered both securities and commodities. According to the SEC and its “Howey test,” the “foundational principles” of securities law apply to virtual currencies like Bitcoin and ICOs. The CFTC has chimed in as well concluding that virtual currencies are commodities under the Commodity Exchange Act. As a result, regulators like the SEC are in the news almost daily now with regard to some aspect of virtual currencies. Those involved with virtual currency are regularly being challenged by a host of regulators. The issues range from outright fraud, to inaccurate disclosures and deficient registrations.
So what does this mean for financial advisors? Among other things, it means you cannot stick your head in the sand any longer. For example, if you or your clients are on the sell-side of virtual currencies you may be required to register with the SEC as a broker-dealer, and/or become a member of FINRA. If you or your clients are on the buy-side of virtual currency, you may be required to register with the CFTC as a CPO and/or a CTA. In an audit situation you may also be required to have a detailed business plan in place when dealing with virtual currencies, as well as policies and procedures specific to ethics, marketing, advertising, AML, cybersecurity, business continuity, and trading requirements.
At the very least, and short of continuing to ignore the future which is here, you need to plan for more detailed and more frequent regulatory scrutiny regarding virtual currencies.