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CFTC chairman admits regulation must keep up with innovation

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Speaking at the digital LA Blockchain Summit, Commodity Futures Trading Commission chairman, Heath Tarbert, said U.S. regulation lags behind crypto and blockchain.

“I would be the first to agree with you that innovation is unlikely to come from the government,” Tarbert told interviewer Anthony Pompliano on Oct. 7 as part of an event segment on the role of digital securities in the derivatives market. Tarbert explained that the private sector often leads innovation, with regulators’ carrying the job of overseeing such advances. He added:

“I see my role as a regulator as not so much innovating ourselves, but we want to be innovative for a regulator, but not necessarily innovate for the community, but we’ve gotta keep up.”

Since the birth of the crypto and blockchain industry roughly 11 years ago, U.S. regulation in general has failed in keeping pace with the quickly developing sector, often using a heavy handed approach. Initial coin offerings serve as one example, bursting onto the scene throughout 2017. In response, regulating bodies came in heavy against this new method of fundraising. As a result, token sales are now all but extinct.

Ripple’s XRP, which has been one of the top crypto assets since 2013 according to rankings from a CoinMarketCap historical snapshot, serves as another example. XRP saw a lawsuit earlier in 2020 claiming the asset as a security — a ruling that should have been clarified years ago. 

Many regulatory growing pains seen in the crypto space relate to the Securities and Exchange Commission, or SEC, although regulation as a whole has some catching up to do.

Tarbert assumed his role as CFTC chairman in July 2019, joining the scene amid significant technological advancement following closure on the 2008 market downturn. “It was a good opportunity for us to revisit our mission,” Tarbert explained. The commission crafted an updated mission statement. The CFTC desires “to promote the integrity, resilience, and vibrancy of U.S. derivatives markets through sound regulation,” Tarbert said, quoting the mission statement. 

“Of those, vibrancy is the one that gets at the innovation, gets at the innovation point that we don’t want our markets to be stale, we want them to be continuing to develop and be innovative.”

The current landscape, however, appears contrary to this stated desire for innovation. U.S. traders still have a difficult time as many crypto exchanges ban U.S. participants, fearing the country’s stiff regulatory scene. Crypto derivatives exchange BitMEX is one of the most recent examples of these related consequences.



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Regulation

ICO issuer charged with fraud by SEC for selling unregistered security

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The United States Securities and Exchange Commission, or SEC, has charged a cryptocurrency issuer for “making materially false and misleading statements” in connection with an unregistered security offering conducted between August 2017 and January 2018, offering further evidence that regulators were still targeting initial coin offerings from the last major market mania. 

Loci Inc., the platform behind LOCIcoin, and CEO John Wise were formally charged on Tuesday. The SEC claims that Loci and Wise misled investors about the company’s revenues, employee numbers and user base during the $7.6 million crowdsale. The regulator also alleges that Wise misused $38,163 in investor proceeds for personal expenses.

“Loci and its CEO misled investors regarding critical aspects of Loci’s business,” said Kristina Littman, the head of the SEC Enforcement Division’s cyber unit, adding:

“Investors in digital asset securities are entitled to truthful information and fulsome disclosures so they can make informed investment decisions.”

The order also requires that Loci and Wise pay a $7.6 million civil penalty for their transgressions.

Handing out penalties to cryptocurrency businesses is nothing new for U.S. authorities. Regulators from the SEC, Commodity Futures Trading Commission and Financial Crimes Enforcement Network have imposed fines of more than $2.5 billion on cryptocurrency-related businesses since 2014, underscoring the murky regulatory climate surrounding digital assets.

Elliptic Enterprises, a blockchain analytics firm headquartered in the United Kingdom, reported Tuesday that the $2.5 billion in penalties covered a broad range of infractions, including fraud, the selling of unregistered securities and a failure to uphold Anti-Money Laundering regulations.

The SEC accounted for the lion’s share of the penalties at $1.69 billion. The CFTC imposed penalties of $624 million and FinCEN slapped crypto businesses with $183 million in fines. The Office of Foreign Asset Control handed out the smallest fines among the regulators at $606,000.

Cryptocurrencies have been described by many as the wild west of finance. Tens of thousands of crypto-centric projects have launched in the wake of Bitcoin’s genesis block in early 2009. Many of these companies got their start in 2017 during the height of the initial coin offering boom.

Related: With US regulators handing out $2.5B in fines since 2014, crypto is not the ‘wild west’ of finance

ICOs allowed crypto startups to raise millions of dollars without having to meet the stringent regulations of more traditional security offerings. ICO funding reached the tens of billions in 2017 and 2018 combined, attracting unwanted attention from securities regulators. The SEC successfully charged the founders of several crypto companies, which effectively put an end to the mania — in the United States, at least.