Gary Gensler, the new head of the SEC previously taught classes about blockchain
and other financial technology at MIT (in fact his classes are available for free here on YouTube).
He has said to the press that he sees cryptocurrencies as a “speculative” store of value
and that he believes the SEC should be “technology neutral” when it comes to innovations in markets.
He has said that many crypto coins trade like financial assets, can be considered securities
and should fall under the purview of the SEC. He has spoken in the past about social media’s
influence on financial markets saying that “We need to update and freshen our rules
to ensure that, while any individual has First Amendment rights to speak,
that they’re not misleading the public or manipulating the markets,”
For now, though, the SEC’s official position is that cryptocurrencies are not securities
and thus don’t fall under its jurisdiction. In the UK, the FCA recently came out with a ruling
that the crypto exchange Binance cannot conduct any "regulated activity" in the UK.
In addition, they posted a warning on their website that if you invest in crypto assets
you will not have access to the Financial Ombudsman Service or the Financial Services
Compensation Scheme if things go wrong. Similarly, in Europe, most crypto assets fall
outside EU financial services legislation, and outside investor protection rules.
Many viewers might think that crypto is not a big deal, just a flash in the pan, but according to
Robinhoods IPO filings, 17% of last quarter’s revenue came from cryptocurrency transactions.
So what protections are in place right now for those who put their money in crypto assets?
Well, when it comes to consumer protections, the quick answer is there aren’t any.
Regulators and policymakers are still struggling to define what these products are. The pace of
development in the crypto industry has outstripped regulators’ ability to respond. Most financial
rules introduced in the past decade relate to issues unearthed in the 2008 financial crisis.
There is some very limited regulation in place right now. Cryptocurrency brokerages in the US are
licensed as Money Transmitters and don’t carry the same protections as traditional brokers or asset
managers. Unlike bank deposits, money stored in crypto accounts is not covered by FDIC insurance.
In the UK, companies that provide crypto trading or custody must register with the regulator for
anti-money laundering oversight. More than 50 companies have withdrawn applications with the FCA
to operate registered cryptocurrency businesses in Britain after the
watchdog pushed back over low standards. “Even if a crypto asset business is registered
with us, we’re not responsible for making sure that they protect your assets,” the FCA said.
So, what happens if a regulator bans a brokerage you deal with?
Well, the FCA’s Binance decision seems maybe more symbolic than anything else right now.
British consumers can still access the website, but they now see a warning from
the FCA saying that the exchange is not allowed to conduct regulated business
in the UK. This isn’t exactly prohibitive, as according to the FCA only 4 percent of British
crypto traders even use a UK exchange. US-based investors are barred from buying
cryptocurrency derivatives unless the companies offering them are registered with the CFTC,
but regulators are aware that investors use VPN’s to get around these restrictions.
What happens if your crypto password is lost or stolen? Well, crypto owners are responsible for
looking after their unique “private keys”, which operate like passwords. If they lose
or forget this, it can’t be recovered, so the crypto assets are lost forever.
Even the most regulated exchanges, like Coinbase, don’t cover investors who lose their password.
Some estimates put forth that 20 percent of the supply of bitcoins has been lost this way.
Exchanges don’t really offer much protection if someone hacks your account and steals your
holdings. The blockchain that holds the record of all transactions is so widely distributed
that it’s impossible to unwind a transaction and restore your funds - unlike in the case
of credit card fraud. That complexity is part of the design of the system.
What happens if your exchange or broker goes bust? Once again you don’t get the protections
you would get in traditional financial markets. In crypto, it may take a very long time to
get any assets back, and the most likely outcome is that you’ll get nothing back.
For this reason, many crypto investors keep their assets in cold storage rather than on
an exchange or with a broker. This is to be expected when the firms you are
dealing with sit outside protections offered by government-backed deposit insurance schemes.
Finally, what happens if you are the victim of financial fraud?
Well financial fraud is dealt with by law enforcement in most countries. The police do
investigate cybercrimes, and the links between crypto and illicit activity, but their ability
to recover stolen cryptocurrencies can be limited. The SEC have gone after numerous Ponzi schemes in
the Crypto space. In 2013 Andrew Calamari, the Director of the SEC’s New York Regional Office
said, “Fraudsters are not beyond the reach of the SEC just because they use Bitcoin or
another virtual currency to mislead investors and violate the federal securities laws,”
Lori Schock, the Director of the SEC’s Office of Investor Education and Advocacy
says that “Ponzi scheme operators often claim to have a tie to a new and emerging technology
as a lure to potential victims,” “Investors should understand that regardless of the type of
investment, a promise of high returns with little or no risk is a classic warning sign of fraud.”
What about pump and dumps – or rug pulls as they are often referred to in the crypto space?
Pump and dump schemes are illegal, and the SEC considers them securities fraud. The CFTC even
offers a bounty of 10-30% of monetary sanctions for whistleblowers who turn in subjects planning
pump and dump operations. While enforcement on this front has been very light, the fact that
all transactions are permanently recorded on the blockchain means that investigators should be able
to accurately piece together what happened when they get around to doing these investigations.
We are starting to see regulators step in in these cases. On the 14th of July the SEC fined a UK
firm for failing to disclose the compensation it received from issuers of the digital asset
securities it profiled. There would appear to be a huge issue with social media influencers
touting crypto assets like this. [Logan Paul]"I'm a Dink Doink Fan" - "Thats why
I'm all in" While the tout was fined in this case, it is worth noting that none of the
people who lost money in the pump and dump got any of their money back, so buyer beware.
There are a lot of unregulated markets out there like the market for fine art, classic cars or
other collectables like stamps. In those markets’ much like in crypto markets participants are
usually aware that they have to be careful. Most of those transactions are covered by contract law,
and usually buyers have reasonable knowledge of who they are dealing with. The crypto market,
due to its anonymous nature - exposes investors to significantly more risk. Even if you can
prove that someone ripped you off, that doesn’t mean that your stolen assets can be recovered.
Don’t forget to like and subscribe and see you in the next video. Bye.