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Frequently Asked Questions: Cryptocurrency Regulation in the U.S.

Traders Magazine Online News, August 6, 2018

Jesse Brown

The number of hedge funds investing in cryptocurrencies is soaring, which means regulators are taking notice. The Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and Commodity Futures Trading Commission (CFTC) have all made statements over the past year about digital assets, but what does this mean for investment advisers looking to create cryptocurrency products? Jesse Brown, one of our compliance associates, outlines the regulatory trends U.S. advisers should consider when thinking about investing in cryptocurrencies.

Q.†What are cryptocurrencies?

A: A cryptocurrency is generally defined as a medium of exchange that only exists digitally, for example Bitcoin, Ethereum and Ripple. These were envisioned as a new form of currency that werenít under government control and didnít need a bankís participation to transfer funds between parties. A decentralized system called blockchain technology records these cryptocurrency transactions, which are encrypted so that only participants can see and verify them. The creation of new cryptocurrency units is also controlled by encryption on the blockchain.

Q. How do US regulators view cryptocurrencies?

A: The SEC announced in its 2018 exam prioritiesthat it will monitor the sale of cryptocurrencies and initial coin offerings (ICOs). They have made general statements noting that the underlying blockchain technology may have the ability to transform a variety of industry models. The agencyís priorities are now focused on making sure it has an appropriate regulatory framework, while still allowing for innovation in the space.

Another regulator thatís paying attention to cryptocurrencies is the Financial Industry Regulatory Authority (FINRA), which recently surveyed its members to see how involved they are in digital assets. They supplemented this with a regulatory notice published on July 6, 2018 asking FINRA members to notify the regulator if they or an affiliate engages or intends to engage in activities related to digital assets. This fact-finding exercise will likely result in new FINRA regulations by the end of the next year.

As of now, there are no concrete guidelines from the SEC or FINRA on cryptocurrency, but the U.S. Commodity Futures Trading Commission (CFTC) has defined cryptocurrencies as commodities. Advisers should treat them as such by applying the same compliance controls they would with any other commodity asset.

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