Shearman & Sterling LLP | FinTech Insights | NASAA Cracks Down on Fraudulent ICOs and Enters into Information Sharing Agreement with the CFTC
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  • NASAA Cracks Down on Fraudulent ICOs and Enters into Information Sharing Agreement with the CFTC
    5/30/2018
    At the North American Securities Administrators Association Conference on May 21, 2018, NASAA, an association of state and provincial securities administrators in the United States, Canada and Mexico, announced a joint effort among its members to halt fraudulent initial coin offerings and virtual currency-related investment products.  The so-called “Operation Cryptosweep,” which was launched this past April, consists of NASAA members from 44 jurisdictions in the United States and Canada and has to this point led to nearly 70 inquiries and 35 pending and completed enforcement actions, with more expected in the coming months.

    These enforcement actions are “just the tip of the iceberg,” according to NASAA President and Alabama Securities Commission Director Joseph P. Borg.  Borg also emphasized the role of state and provincial securities regulators as a part of this effort, stating that “[d]espite a series of public warnings from securities regulators at all levels of government, cryptocriminals need to know that state and provincial securities regulators are taking swift and effective action to protect investors from their schemes and scams.”

    An additional prong of Operation Cryptosweep involves increased consumer education regarding investments in the ICO and virtual currency space.  Borg noted that investors should be aware that “[n]ot every ICO or cryptocurrency-related investment is fraudulent,” but he also urged investors to take advantage of NASAA’s resources and exercise extreme caution when dealing with these products due to the potential risks attached. 

    Securities and Exchange Commission Chairman Jay Clayton also issued a statement in support of the initiative.

    Concurrently, NASAA and the Commodity Futures Trading Commission announced an information sharing agreement intended to assist federal and state-level regulators in enforcing the Commodity Exchange Act.  While the agreement is broad in nature, the organizations made it clear that virtual currencies will fall under its scope, noting that the agreement is “particularly relevant given the recent epidemic of schemes involving cryptocurrencies and other modern types of commodities.”  

    Operation Cryptosweep represents a continuation of the heightened scrutiny these products have faced from U.S. federal and state regulators over the past year.  We will continue to monitor Operation Cryptosweep as well as the product of NASAA’s and the CFTC’s information sharing agreement.