Government Fires Warning Shot at Crypto Investors

The price of Bitcoin rose thirteenfold in 2017, but it was the turbulence and wild price swings in the digital currency market that have caused growing concern among regulators across the globe.

Government agencies have increased their monitoring of the virtual currency market with a view towards implementing regulations that would curb existing and potential abuses, prevent fraud and eliminate illicit trading activities.

In the United States, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) issued a joint statement in which they cautioned individuals investing in the cryptocurrency markets.

The chairmen of both agencies warned that because the Bitcoin markets are not yet mature and some trading platforms lack transparency, the potential for fraud and abuse is high.

Both agencies expressed their intention to bring actions against those who engage in fraudulent and deceptive practices in the cryptomarkets.

The statement noted that rampant speculation and questionable value of the underlying cryptocurrencies are reminiscent of the 1990’s bubble that left many investors with large losses.

They also expressed concern that some of the “spot” platforms that determine the price of cryptocurrencies are based offshore — beyond the reach of U.S. regulators.

Both the SEC and CFTC said the price of Bitcoin can be ephemeral and that its underlying value based on nothing more than pure speculation.

“Cryptocurrencies are now being, promoted and traded as traditional investment assets, with their purported utility as an efficient medium of exchange being a distant secondary characteristic,” the agencies warned.

Warning shot

Regulators are firing a warning shot across the bow of unscrupulous traders or virtual market participants as well.

“When market participants engage in fraud under the guise of offering digital instruments — whether characterized as virtual currencies, coins, tokens, or the like — the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws.” 

Both agencies acknowledged that because the digital coin markets are fairly new, continually evolving and international in scope, in order to be effective in curbing fraud they will need to be nimble and forward-looking, coordinating with state, federal and international colleagues.

Michael Arrington, whose firm Arrington XRP Capital invests in digital coin space, said that the SEC is starting to examine companies in the space with a “fine tooth comb.”

Concern about cryptocurrency market manipulation and fraudulent Bitcoin trading practices is not limited to United States regulators.

China has banned initial coin offerings in its domestic cryptocurrency market. In March of this year at the G20 summit, both Germany and France intend to put forward joint proposals for regulatory action.

Arrington additionally noted that governments in Asia are concerned about losses in the crypto space disrupting other areas of the markets.

The uncertainty of regulatory intervention in both the Chinese and South Korean cryptocurrency markets has made investors in those countries jittery, too.

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