What can SEC and other regulators’ activities tell us about investment due diligence for cryptocurrencies?

Posted by Andrew Borowiec on Aug 16, 2018 6:06:00 AM

what-can-sec-and-other-regulators-activities-tell-us-about-investment-due-diligence-for-cryptocurrenciesThere are few areas of investment likely to draw as big a reaction as cryptocurrencies, whether excitement at the potentially astronomical profits or fear at the shadier side filled with stories of hacking and fraud. Firms raised about $12 billion in initial coin offerings through the first quarter of 2018. In June, ICOs raised a record $5.6 billion, according to data compiled by Coinschedule.

Regardless of the volatility and criminality elements, it looks like cryptocurrencies are here to stay as a significant category when it comes to investments. And for due diligence professionals, this means learning how to effectively conduct investment due diligence for cryptocurrencies.

There might be a necessity to do it, but guidance on how to do it is hard to come by. With this in mind, we thought we’d turn to the regulators and see if any of their recent actions could be seen to have an interpretation for those of us trying to due diligence an ICO investment or similar.

Recent SEC actions & what they mean

April 2, 2018

The Story:

SEC busts fraudulent ICO endorsed by Floyd Mayweather — founders defrauded $32M. The SEC shows its teeth in taking decisive action against a fraudulent enterprise, which by virtue of ICOs falling into the category of securities, comes in the SEC’s purview.

The Inference For Investment Due Diligence:

As SEC prosecutions begin to occur, investors can start to build a degree of confidence that the space will not be the alleged financial “wild west” it has been so far.

That is not to say that intense scrutiny during investment due diligence for cryptocurrencies is not required. Much of the messaging offered by the SEC is around protection for Main Street investors, with market professionals being expected to know enough and have resources enough to watch out for themselves.

June 4, 2018

The Story:

Ms. Valerie A. Szczepanik has been named Senior Advisor for Digital Assets. Her responsibilities are to “coordinate efforts across all SEC Divisions and Offices regarding the application of U.S. securities laws to emerging digital asset technologies and innovations, including Initial Coin Offerings (ICOs) and cryptocurrencies.”

The Inference For Investment Due Diligence:

The SEC is taking the regulation of the cryptocurrencies market and specifically ICOs very seriously. Investment due diligence professionals should be aware that cryptocurrency investments and managers specializing in or maintaining specialized divisions in this market are highly likely to form a focus area for SEC examinations over the coming years.

Recent international regulator actions & what they mean

April 19, 2018

The Story:

The European Commission announces that the 5th Anti-Money Laundering Directive will expand the language of the 4th to include steps to limit the risks posed by virtual currencies for terrorist financing.

The Inference For Investment Due Diligence:

Increased transparency and traceability will become the new norm for cryptocurrency exchange and trading. Expect significant examples to be made of cryptocurrencies, exchanges, users and investors who contravene the 5th AMLD.

July 30-31, 2018

The Story:

The G20 meet to discuss the next steps on creating a unified approach to the regulation of cryptocurrencies as part of the digital economy.

The Inference For Investment Due Diligence:

Not only will we shortly see concrete regulations appear in all major countries where we invest, but there is hope that we shouldn’t have to find our way through many sets of vastly different regulations in each different nation. A unified approach to regulation and governance of cryptocurrencies will make the job of the due diligence professional much simpler.

Enjoyed transferring regulatory actions into usable insights for your investment management due diligence for cryptocurrencies? Find out more about what the SEC does during its examinations and how you can apply that in your own due diligence training. Access the webinar recording and slides here.

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Tags: Investment Due Diligence, Due Diligence for Cryptocurrencies

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