Digital Assets in the Regulatory Spotlight in Q1 2018

During the first quarter of 2018, U.S. regulatory agencies and a federal district court issued statements and took actions that are likely to significantly affect the U.S. regulatory landscape for digital assets, including cryptocurrencies, initial coin offerings, and digital asset trading platforms. This blog post is a summary of our article detailing the recent key regulatory developments that apply to organizations operating in the U.S. digital asset space. Click here for the full article.

Key Q1 Developments

• January 18, 2018 — The U.S. Securities and Exchange Commission (“SEC”) issued a Staff Letter to the Investment Company Institute (“ICI”) and Securities Industry and Financial Markets Association (“SIFMA”) highlighting the SEC’s concerns regarding how mutual funds and ETFs that hold cryptocurrencies would satisfy the requirements of the Investment Company Act of 1940.
   

• March 6, 2018 — A New York federal judge ruled in favor of the U.S. Commodity Futures Trading Commission (“CFTC”), affirming the CFTC’s authority over spot commodity markets in cases of fraud or manipulation. The court also ruled that digital currencies are commodities, as they fall “well within” both the common definition and the Commodity Exchange Act’s (“CEA”) definition of commodities.
   
• March 7, 2018 — The SEC’s Enforcement Division and Trading and Markets Division issued a Statement on Potentially Unlawful Online Platforms for Trading Digital Assets (“Statement”). The Statement expressed the agency’s view that “a number of these digital asset platforms provide a mechanism for trading assets that meet the definition of a ‘security’ under the federal securities laws.” The Statement affirmed, moreover, that “a platform [that] offers trading of digital assets that are securities and operates as an ‘exchange,’ as defined by the federal securities laws…must register with the SEC as a national securities exchange or be exempt from registration.”
   
• March 14, 2018 — Various news outlets reported, and ACA is able to confirm, that the SEC sent information requests to investment advisers managing funds containing digital assets. The SEC’s demands concerned these advisers’ practices in areas including marketing, valuation, investor disclosure, and compliance with the custody rule. Bloomberg reported that funds had received requests for information from both the SEC’s OCIE and Division of Enforcement.

Needless to say the first quarter has made its regulatory mark on digital assets. ACA is currently working with investment advisers, digital asset platforms, and other institutional investors seeking to address the SEC’s questions and establish digital asset advisory and other businesses that are looking to meet SEC regulations and institutional best practices in the digital asset arena.

About the Author

Mike Seery is a Senior Principal Consultant at ACA Compliance Group. He helps hedge fund, private equity fund, and other SEC-registered investment advisers create and maintain best-in-class regulatory compliance programs. Mike advises clients on complex regulatory issues, including portfolio valuation, expense allocation, soft dollars, and expert networks.