Feds Crack Down on Funds Linked to Cryptocurrencies


If you think investing in funds linked to cryptocurrencies is safer than buying cryptocurrencies themselves, think again.

The U.S. government is tightening its regulation of crypto funds and telling investors to think twice before putting money in them.

Opportunities abound for price manipulation as cryptocurrencies grow in number. There are 1,470 listed on Coinmarketcap.com, including roughly 1,000 that trade at prices below $5.

“Investors should understand that to date no initial coin offerings have been registered with the SEC,” the U.S. Securities and Exchange Commission said in a statement by SEC chairman Jay Clayton.

The potential price volatility that crypto investors face is underscored by the breakdown of BitConnect (BCC), a cryptocurrency that peaked in December at $509.99 and later shut down amid claims it was a Ponzi scheme.

Questions that investors in crypto funds should ask were part of an SEC staff letter on Jan. 18 to two organizations that represent companies in the securities and investment business, the Investment Company Institute and the Security Industry and Financial Markets Association.

Among other questions, the letter urged crypto fund investors to ask how cryptocurrencies are valued in daily determinations of a fund’s net asset value.

SEC staff also urge investors to ask how a fund mitigates risk, how it arranges for custody of cryptocurrency, how it ensures fair treatment of investors amid price volatility, and whether the fund is liquid enough for redemptions on a daily basis.

Charges filed

As the SEC sounded those alarms, the federal Commodity Futures Exchange Commission charged three operators of cryptocurrency-related businesses with defrauding customers and other violations of commodities trading regulations.

The CFTC filed lawsuits against all three defendants in a district count in New York. They included New York-based Patrick McDonnell and his business CabbageTech, charged with stealing from customers through virtual-currency trading and other services.

The CFTC also charged Colorado resident Dillon Michael Dean and his Entrepreneurs Headquarters Ltd., a company registered in the UK, with running a Ponzi scheme. Dean and his company were charged with grabbing $1.1 million in bitcoin from 600 investors by falsely claiming to pool and invest their investments..

The third lawsuit the CFTC filed was under seal.

These are the first cryptocurrency enforcement actions by the CFTC since the agency allowed trading in bitcoin futures contracts in December.

That decision led some members of the Wall Street community to criticize the CFTC for failing to gather feedback from more companies in the futures industry before allowing bitcoin futures trading.