Attorneys on Davis Polk’s financial regulation blog highlighted yesterday a CFTC enforcement action brought “against the operators of an alleged Ponzi scheme who, according to the allegations, collected approximately $600,000 from 80 investors in a pooled fund to invest in bitcoin under a high-frequency, algorithmic trading strategy. The operators instead allegedly misappropriated the funds and fabricated a hack to hide the losses.”
With the enforcement action in view, the authors made some useful observations:
- The CFTC is closely monitoring virtual currency markets, not only markets in derivatives on virtual currencies.
- Even where tokens do not constitute securities, transactions in and activities involving tokens are likely subject to the CFTC’s anti-fraud jurisdiction on the basis that non-security tokens or other digital assets are commodities for purposes of the Commodity Exchange Act.
- The CFTC and SEC are likely to have overlapping jurisdiction
Then towards the end of the note, the authors add the following:
The CFTC’s press release raises questions about how closely the CFTC’s enforcement division may be coordinating with the newly established LabCFTC. The press release states that “aggressively and assertively” rooting out fraud and bad actors in these areas demonstrates the agency’s “continued commitment to facilitating market-enhancing FinTech innovation,” as exemplified by LabCFTC.
I’m not sure (yet) whether or not the enforcement action, in itself, raises questions about LabCFTC. Besides the fact that the program is little more than a couple of months old, my hunch is that regulators are still formulating both its mandate and the parameters in which it will perform it. Moreover, this is a case of old-fashioned fraud, not one that lies at the intersection of experimentation and enforcement.
Still, the post raises interesting questions about the relationship between regulatory experimentation and enforcement. To the extent to which regulators (whether in the US or abroad) seek to liberalize conduct by adopting principles or even objectives-based regulation, a different kind of enforcement mechanism may be necessary—one where regulators are empowered to act proactively to steer participants in ways that reflect their expectations where unexpected technological or market developments arise. This requires resources, however, which is in short supply nowadays, especially at the CFTC.