Cryptocurrencies promise a tantalizing world of borderless currency movement, but legal experts warn that traders should be fully appraised of the laws surrounding crypto, as the space comes under increasing scrutiny from regulators.
"Ignorance of law is no defense in this area," warned Jason Gottlieb, Attorney and Partner at Morrison Cohen, a New York-based international law firm. "If you are insider trading in any securities or commodities that touch the United States, then some United States regulator—the Securities Exchange Commission (SEC), or the Commodity Futures Trading Commission (CFTC)—will have authority over your trading."
While Bitcoin and Ethereum aren't regarded by the SEC as securities, many cryptocurrencies could still fall under that definition according to the Howey Test; those that carried out initial coin offerings (ICOs) have come under particular scrutiny from the SEC.
US regulators have been signaling growing interest to rein in illegal activity in the cryptosphere, with the CFTC recently announcing plans for comprehensive regulation of crypto within four years, and the Financial Action Task Force’s Travel Rule requiring exchanges and wallets to divulge certain users’ personal information.
Most recently, both the SEC and CFTC teamed up to crack down on tokenized stock and currencies trading platform Abra, accusing the company of offering unregistered securities and fining them $300,000.
What rules apply to crypto trading?
What should the average crypto trader know about to keep abreast of the rules?
To begin with, even if you’re not in the US, and are trading cryptos outside the US, the SEC or CFTC could still come after you if they deem you are using insider information to trade digital assets that are involved with the US market.
“There are plenty of instances where the SEC has sued individuals living abroad for insider trading of securities that are traded inside the United States,” said Gottleib to Decrypt media partner Forkast.
What exactly is insider trading?
Gottlieb explains that while there is no specific definition of insider trading, there are three ways to be found liable for the activity in the United States.
The first is classic liability: knowing material, non-public information about a company that you work for and trading on that information.
The second is tipper liability: someone who knows information and has a duty to keep that non-public information confidential, but gives a tip to a person who is likely to trade on that information.
The third is tippee liability: someone who trades on a tip from a source who is responsible for keeping non-public information about a company confidential.
As noted above, the SEC regards most initial coin offerings (ICOs) and initial exchange offerings (IEOs) as essentially being securities offerings. “If these coins are being traded on an exchange, the SEC’s default position is going to be to say that these are publicly traded securities,” said Gottleib.
That means that even if one were to trade cryptos through an exchange, and even if trading was done for a private company, one could still run afoul of securities laws if based on material non-public information.
There is some dissent within the ranks of the SEC over the question of ICOs and securities, with SEC Commissioner Hester Peirce speaking out against its decision to crack down on Telegram's $1.7 billion ICO. However, the organization is unlikely to change its views any time soon.
This story was produced in collaboration with our friends at Forkast, a content platform focused on emerging technology at the intersection of business, economy, and politics, from Asia to the world.
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