by Divonne Smoyer, Roger Gibboni, Christine Parker, and Jonathan Marcus
One in 10 Americans invested in crypto currencies this year, so it’s no surprise that state and federal agencies are jockeying up to regulate and enforce crypto markets.
That’s because any relatively new (and poorly understood) financial product – in which a significant number of consumers are investing large amounts – is going to draw the attention of regulators and enforcement agencies.
State attorneys general (AGs) are no exception. Now some state AGs are asking how they may investigate potential consumer harms associated with crypto currencies. State AGs have established a significant national footprint in consumer protection, including and particularly over investment products.
To that end, the National Association of Attorneys General held the “The Surveillance Economy: How Attorneys General Protect Privacy, Safety, and Equality in the Information Age” conference Oct. 7 and 8 in Burlington, Vt. AGs from Connecticut, Washington, D.C., Guam, Massachusetts, New Hampshire, New York, and Vermont attended the event. While this conference focused on several important issues, including data privacy and artificial intelligence, an entire panel was dedicated to emerging issues in the cryptocurrency space, including cryptocurrency’s role in ransomware attacks.
The panel featured SEC Commissioner Hester Peirce, former CFTC Commissioner Brian Quintenz (now an advisory partner at a cryptocurrency venture fund); and noted Bitcoin critic Bob Seeman. It was moderated by Vermont AG T.J. Donovan, who was well-versed and highly interested in the issue. Panelists discussed the nature of cryptocurrency and how to define it for the purposes of regulation (e.g., a security, a commodity, property, etc.). This definition is critical for how cryptocurrencies are issued, exchanged, taxed, and regulated. Panelists also debated whether cryptocurrencies and the blockchain technology that facilitates them are like “the early days of the internet” or “the world’s biggest Ponzi scheme” and a new age “tulipmania.” This sparked discussion over whether regulation of these products should be effectuated through enforcement or traditional rulemaking.
There was also significant conversation about who should be the enforcement authority overseeing cryptocurrency markets. It was noted that there is currently hot competition among agencies like the SEC, the CFTC, and the Internal Revenue Service to be the primary agency in that role. The panelists agreed that some sort of federal “solution” (i.e., legislation) is necessary to provide clarity and fill the vacuum, and that numerous crypto companies want thoughtful regulation. Interestingly, in early October 2021, the U.S. Justice Department established a National Cryptocurrency Enforcement Team, whose aim is to combat ransomware attacks and other criminal activity involving cryptocurrency by focusing on cryptocurrency exchanges and other infrastructure that have been used to launder illicit proceeds. Further, reports recently surfaced that the Biden administration is considering issuing an executive order directing federal agencies to study cryptocurrency markets and propose ways to effectively regulate them.
Several AGs in attendance emphasized that the states play a critical role in protecting consumers from scams associated with cryptocurrency. The panel agreed that the AGs play an important role in this space and encouraged those in the room to engage with the federal agencies, including the SEC and CFTC, to combine resources to crack down on fraud. Commissioner Pierce noted that the AGs have a friend at the SEC in former New Jersey AG Gurbir Grewal, who President Biden recently named as the director of the agency’s enforcement division. While future federal legislation could potentially empower a federal agency to regulate and oversee cryptocurrency markets, state AGs will likely continue to play an important role in the near future and beyond, given the significant consumer protection implications of buying and selling cryptocurrencies.
Clients dealing in cryptocurrencies, either directly, or indirectly, should carefully consider the growing role of state AGs in this space and develop a strategic engagement plan to avoid unnecessary investigations and enforcement actions. Many regulators and enforcement agencies, including state AGs, might not fully appreciate the technological developments ‒ or the consumer benefits of such developments ‒ happening in this area every day. Therefore, outreach and education are paramount. Clients working with other nascent technologies that are closely associated with cryptocurrencies, including blockchain technology, should similarly be aware of the state AGs’ interest.
Divonne Smoyer, Christine Parker, and Jonathan Marcus are partners, and Roger Gibboni is an associate, at Reed Smith LLP.
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