Regulatory compliance is one of the most (if not the most) stressful points surrounding cryptocurrencies. Regulators around the world are striving to effectively understand and classify blockchain-based projects in an effort to protect the investor public from the scammers who plague this nascent industry.
Joe Rotunda, the director of the Enforcement Division at the Texas State Securities Board, is well known for his positive stance towards digital currencies. He shared his opinions with [blokt] on the obstacles that regulators are facing while the cryptosphere is constantly changing and bad actors employ new ways to deceive their victims. It emphasizes the need for regulators to adapt to the new practices that blockchain technology has introduced and to act against offenders without interfering with innovation and legitimate entrepreneurship.
Nick Tsakanikas: We have noted the actions that the Texas Securities Commissioner and others have taken against the bad actors in space. Did these actions act as a deterrent? See any variation in the amount of fraud in the industry?
Joe Rotunda: Bad actors continue to exploit widespread interest in cryptocurrencies to target the investing public. The Enforcement division has now obtained 16 enforcement actions to stop 57 promoters of illegal, fraudulent, deceptive and / or misleading cryptocurrency investment products. In many cases, we know that these law enforcement actions have led promoters to interrupt their programs, preventing them from taking on new victims and continuing to threaten public harm. For example, on 4 January 2018, the Securities Commissioner entered an emergency suspension and abandoned the order against BitConnect. The market capitalization of the issuer was around $ 2.6 billion at the time of the registration of the action. Shortly thereafter, BitConnect announced publicly that it would comply with the order of termination and suspension of the emergency. Its market capitalization decreased by 98.6% in the following month, and now its currencies are essentially illiquid and worthless. As a result, BitConnect can no longer threaten immediate and irreparable public damage.
In some cases, a new bad actor emerges after the collapse of his competition. For example, after BitConnect stopped its fraudulent cryptocurrency investment system, DavorCoin announced it was taking the lead, arguing that the demise of BitConnect meant that DavorCoin was "the world's number one lending platform". The Securities Commissioner immediately entered the emergency ceases and desist orders to stop DavorCoin from illegally and fraudulently offering its securities in Texas. In the following two weeks, the price of DavorCoin decreased by 88.6%, from $ 8.36 to $ 0.036 per currency, and the currencies are now basically worthless. As a result, just like BitConnect, DavorCoin can no longer threaten immediate and irreparable public damage. We are ready to take future action against companies like BitConnect, which run a widespread illegal investment program, and against companies like DavorCoin, which fraudulently solicit the public after the collapse of their competition.
We are continuing to open investigations into fraudulent cryptocurrency offers and now we have opened more than 100 investigations in which the suspects offer potentially illegal or fraudulent cryptocurrency titles. This is not necessarily a unique phenomenon, since bad actors have historically tried to exploit the hype, the interest or the developments in the financial markets to illegally and fraudulently obtain capital from the public. We have witnessed similar situations when bad actors began to play a new market, such as the fraudulent sale of settlement contacts during and after the AIDS epidemic and the HIV crisis in the 1980s. and & # 39; 90, when bad actors follow the price of a commodity, such as the fraudulent sale of investments in oil drilling programs in response to the increase or decrease in the price of oil, and when bad actors attempt to take advantage of new technologies, such as the fraudulent sale of investments related to public telephones and ATMs. Our task is to protect investors from bad actors who sell these securities fraudulently, which involve cryptocurrencies, investments in life settlements, investments in oil drilling programs, investments in public telephones and ATMs or interests related to any new product or single.
NT: In your opinion, where is the responsibility to protect investors? In the industry, with regulators or a combination of both?
JR: The State Securities Board is responsible for the regulation of the securities market in Texas and its Enforcement Division is responsible for investor protection by identifying offers of securities that violate the law and pursuing any appropriate administrative, civil or criminal action. This is our responsibility, and it is one that we take very seriously. At the same time, anyone in the securities market that offers or sells securities in Texas is responsible for complying with the Securities Act, which generally requires the registration of people who sell securities in Texas and the registration or licensing of securities offered in Texas. The Securities Act also contains disclosure requirements that are essential for the protection of the investing public, and probably the most relevant disclosure requirement requires that all securities sellers must disclose all material facts known to potential investors. The disclosure of all known relevant facts plays an important role, as it ensures that investors are able to fully understand the risks associated with an offering of securities and make a fully informed decision about their will to take such risks. As the old proverb says, knowledge is power and, in this case, power allows investors to understand the conditions of their investment and the risks associated with investment before they separate themselves from their money.
NT: do you think that the cryptocurrency sector is ready to see investment products aimed at a wider audience? for example, ETF.
JR: The industry that deals with digital currencies has been marked by evolution, change and innovation. What we are seeing right now may not be what we see in the future. I really believe that we take advantage of reflecting on the past when we consider the relatively rapid development of the modern market for investment products linked to virtual currencies.
We know all the tradable virtual currencies used in World of Warcraft, Everquest and other popular video games and MMORPGs. We are also familiar with digital tokens that can act as very limited virtual currencies, such as rewards offered by merchants who offer discounts or can be exchanged for goods or services. These types of online currencies are circulating from the intersection of computers and the Internet, and they probably will not go anywhere anytime soon.
The market really began to take shape as organizations began to develop virtual currencies that could be used as a real substitute for legal tender, and when their work began to explain the double-expense problem that plagued potential online payment systems. About twenty-five years ago, for example, a small group of promoters created e-gold to replace cash. They advertised it as "e-gold" because each unit was presumably supported by gold bars stored in facilities outside the United States. The same E-gold has become very popular, at its peak that boasts over 2.5 million participants who have made over 40,000 transactions a day. This virtual currency was neither the first nor the last attempt to create an electronic payment system that would act as a cash substitute. However, after the end of the e-gold and continuing in recent years, digital currencies in their most recognized form generally attracted attention only from groups of developers, enthusiasts and relatively niche hobbyists.
Recently, however, digital currencies that are part of electronic payment systems have increased significantly in popularity. Bitcoin, not surprisingly, ignited the spark. Satoshi Nakamoto introduced Bitcoin only about three years after the peak of e-gold, and obviously proved immensely popular. Just to put these two instances in context, e-gold claimed that its twenty-four-hour trading volume was the equivalent of about $ 6 million at its peak. Bitcoin's 24-hour trading volume exceeded the equivalent of $ 13.5 trillion at its peak. Yes, we have come a long way.
We know that Bitcoin was not very popular in 2008, when Satoshi Nakamoto introduced it to the market. Bitcoin has been trading for around $ 13.00 per currency since January 2013 and about $ 100.00 per currency since April 2013 before reaching $ 1,200 per token in November 2013. Although the price was floating after that point, the price of Bitcoin rose again in 2017 On 13 July 2017, Bitcoin was trading at around $ 2,364.00 per currency. Three months later, on October 13, 2017, its price had more than doubled and the Bitcoin was trading at around $ 5.6000 per currency. Its price rose to around $ 7,777.38 on November 17, 2017 and peaked at almost $ 20,000.00 in December 2017. Although the price has declined since then, it remains extremely popular.
Given the recent widespread acceptance of Bitcoin, it is not surprising that the number of cryptocurrencies in the market has also increased, and that promoters are not simply using technology to create electronic payment systems but that they are using technology for various means of raising capital. We have seen the advent of initial coin offerings, securitized token offerings, utility tokens, managed investments and cryptocurrency hosted, cryptocurrency trading investments, portfolio allocations that include cryptocurrencies and issuers that raise funds for development of hardware and software related to cryptocurrency markets. I do not doubt that other types of investments will begin to be introduced and generate interest.
The past provides at least some clues as to how this market can develop and how it can generate interest in new types of investments. It took a long time for organizations to solve the problem of double spending and create a viable electronic payment system. It took a long time for this electronic payment system to generate widespread interest. Entrepreneurs and innovators have rapidly changed the cryptocurrency market, having introduced over 2,000 cryptocurrencies in good faith to the market and the interest in cryptocurrency investment products has led to a number of different interests that, in this period of Last year, they remained a mystery to many outside a dedicated group of enthusiasts. Consequently, it would not surprise me in the slightest to see the promoters develop new types of investments related to cryptocurrencies and for these new types of investments to generate widespread recourse in the very near future.
NT: We have seen numerous hacking events (in many cases doubtful) associated with the cryptocurrency exchanges, the last of which is MapleChange. Do you think that regulators would be able to eliminate the frauds associated with cryptographic exchanges? Do you have the resources to enforce absolute transparency?
JR: I clearly remember when Mount Gox was violated and we seriously began to increase our vision of cyber security and the need to protect cryptocurrency trade. Around February 24, 2014, the same day Mt. Gox was hacked, I was driving to speak publicly about cryptocurrencies at an event in San Antonio, Texas. I learned that Mt. Gox went dark after checking the price of Bitcoin on my phone that morning. Needless to say, although the details of the attack were not completely widespread, most of the information I had planned to present at the event was obscured by the possibility that hackers stole nearly a million Bitcoins and that customers they lost millions of dollars. This has become the highlight of the presentation, I think, especially because the public could easily imagine themselves in the same position as the account holders: lost, confused, frightened, not knowing where to turn for answers.
At that time, we did not have complete information about the incident at the Mount. Gox and the bankruptcy declaration of the company a few days later did not disclose a significant amount of additional information. I was very worried that this would only be one of a series of immediate hack exchanges of popular cryptocurrencies that could lead to numerous owners losing amounts of unquantifiable money. Moreover, at that time Bitcoin was still in its infancy and these types of incidents, even if they were perpetuated on third parties, could easily undermine the confidence in the cryptocurrency if they had created the belief that owners are unable to enter a position and outside from a position without a significant risk of the theft of their funds.
That said, computer security remains a key issue for regulators. Our agency, FINRA, SIFMA, the SEC and the FCC all provided guidance resources and information on IT security. These resources typically involve registered companies and securities transactions, but the key take-away is the same: cybersecurity is an increasingly important component of our financial markets.
NT: Until now, governments have made independent decisions on cryptocurrencies at the regional level. In your opinion, should there be a common regulatory framework strictly followed by every country at international level? It's possible?
JR: This is a political question and I can not really answer. That said, we already have laws and regulations governing national and international markets and financial systems. I would not be surprised if we heard more and more about the various governments that consider, and in some cases reconsider, the applicability of these laws and regulations to cryptocurrencies. I am neutral on the subject and I do not express an opinion.
NT: Cryptocurrencies like Monero and ZCash guarantee absolute anonymity and privacy in transactions and have been widely used in illicit activities. Therefore, these digital resources pose an additional threat to regulators, so should they be treated more stringently than Bitcoins?
JR: I do not have an opinion in one way or another on the threat posed by these cryptocurrencies and I can not comment because we largely regulate investments related to cryptocurrencies and not to cryptocurrencies themselves.
NT: Last May, Hester M. Pierce expressed the importance of an in-depth education for regulators regarding cryptocurrencies. How well do regulators include cryptocurrencies and blockchain technology?
JR: I am not familiar with Commissioner Pierce's statements to express a deeper opinion, but I believe that regulatory bodies should keep up with market developments. We have shown that we can deal with fraud in the most complex securities offerings and our ability to adapt and evolve with the market is critical to our success.
NT: Ms. Pierce also pointed out that regulators should work with encrypted entrepreneurs in a "normative sandbox," as he said. However, regulatory interference hides traps that could affect innovation. What is your opinion on this topic? Should innovation be unlimited?
JR: I can not comment on the normative sandboxes. The question is, and will probably continue to be taken up by the legislators, so I will postpone for the time being.
NT: You think the encrypted entrepreneurs will embrace the SEC FinHub?
JR: The SEC strategic hub for innovation and financial technology (FinHub), just like the CFTC LabCFTC, is important. Regulatory authorities often engage with companies operating in traditional capital markets and regulatory awareness has proven to be important in learning and understanding "best practices" and in learning new and efficient solutions to existing problems. We even urge people to carefully consider and evaluate public comments before changing existing regulations or adopting new regulations, as regulators need to make informed and fully informed decisions. Interaction is an important driver of fully informed and meaningful decisions.
NT: Do you think that the Howey test needs updating, in order to classify ICOs effectively?
JR: Although the US Supreme Court first articulated the federal "investment contract" standard at Howey in 1946, states have used the term "investment contract" as a means of regulating new, unique or other securities for over a century. The term "investment contract" was first codified in the South Dakota Act of 1915. Shortly after the promulgation of the bylaws, the South Dakota Attorney General's Office considered for the first time the type of product that constitutes a " investment contract "at the time of the review of the sale of splitting interest into an oil lease. He acknowledged that the investor made an investment and received a contractual obligation from the promoter and motivated that this contractual obligation implied that the transaction was subject to regulation as an investment contract. Fractional interest in oil leasing, though on its face other than shares, bonds or other instruments commonly associated with regulation, was therefore a guarantee.
Much has changed since 1915, when the average US wage was around 33 cents per hour, less than 7.5 million cars were registered in the United States, less than 1% of Americans possessed shares , few Americans had a telephone and television, general-computers and the Internet had not yet been invented. However, the investment contract standard worked because it does not depend – in fact, it is completely independent – on these other factors. It was designed to be broad, flexible and to explain the various ways in which a party, regardless of the availability of the underlying technology, would use the funds of another person in an attempt to generate a profit.
NT: Which blockchain application has disturbed the regulators most?
JR: It is not the product. They are the people. I worked on the intersection between cryptocurrencies and stock offers since 2013. At the time, I was part of the North American Securities Administrators Association, often called NASAA. This organization was established in 1919 and is the oldest international organization dedicated to investor protection. Its composition is composed of 67 state, provincial and territorial agencies of the 50 states, the District of Columbia, Puerto Rico, the US Virgin Islands, Canada and Mexico. As part of the Vice President of the NASAA Application Section, we have studied and prepared a release notice on the risks that digital currencies have presented to the investing public. I started to speak publicly in several events that year, describing cryptocurrencies and their incorporation into financial markets. The message was clear then, and it is clear now: it is not the product. They are the people.
A review of our enforcement actions, as well as enforcement actions brought by other regulators, shows that we are concerned about the bad actors exploiting the cryptocurrency hype to defraud the investing public. We are not bringing actions against products due to some features contained in the products; we are bringing actions against people to hide critical information, misrepresent and lie on key terms, hide their identities and their positions, exchange emails, appropriately assimilate and deceive other deceptive acts to strike the public. These bad actors – people, not technology – deserve our attention and we are working to prevent them from inflicting imminent and irreparable damage to the public.
That said, the same blockchain and distributed ledger technology presents a series of challenges for regulators. For example, when investigating schemes involving fiat currencies, regulators are very comfortable in obtaining financial documents – regardless of how voluminous or complicated the financial records are – from a centralized financial institution. Our accountants and examiners are able to conduct accurate and accurate forensic analysis of these financial documents, and their work shows how the promoters obtained funds and how the promoters used the funds. This information is essential for white-collar protection actions, as it allows experts to show to judges and juries whether the suspects have used funds for legitimate reasons or if the suspects have used funds for purposes completely unrelated to the offer of underlying investment.
The distributed blockchain and ledger technology changes everything, since there is no centralized financial institution and the types of registrations now available differ greatly from checks, credit card statements, fund transfer authorizations and other transaction registers in legal currencies. We are rapidly adapting and moving forward. We have to. There is no other choice.
NT: what use case do you think could lead cryptos to mass adoption?
JR: We are neutral from the point of view of content and do not express an opinion about the underlying products as long as they are sold in accordance with the law. I will say, personally and not on behalf of the agency, that cryptocurrencies reflect a new exciting market and their technologies present new opportunities for entrepreneurs, existing businesses and government offices. I'm excited to see the future play.