The murmur of New York City lawyers subsided as representatives of the three largest United States financial regulators were introduced onstage at a meeting of the city's prestigious bar association, which serves 24,000 members.
One voice rose up above the crowd: "Chinese regulators are the most closed to cryptocurrency," the voice said. "The United States is, well, confused."
Facing the crowd of 200 now-silent lawyers, the regulators seemed steeled to present a unified front, even if the audience member's comment fell on deaf ears.
After years of watching the $346 billion cryptocurrency industry and preparing from the sidelines, the regulators from the US Securities & Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority (FINRA) recently released a flurry of guidance statements.
But in the face of demand that seems to exceed the agencies' resources, it has become increasingly important that they cooperate and coordinate investigations and actions.
Speaking on a panel about the various regulatory perspectives on cryptocurrencies, their underlying blockchain technology and the resulting fundraising mechanisms called initial coin offerings (ICOs), the head of the SEC's newly created cyber unit, Robert Cohen, explained why agency cooperation was so important.
"For better or for worse, there is a lot to do here, and it's not just the case of a few agencies doing a few things," said Cohen, who was appointed chief of the cyber unit last year. "We each have more to do than we can handle."
Since Cohen's cyber unit was established in September 2017, the agency has seen an increase in actions taken against allegedly fraudulent ICOs, which seek to raise capital by selling crypto-tokens similar to bitcoin. Most recently, in April, the SEC charged the cofounders of Centra Tech Inc. for allegedly conducting an unregistered initial coin offering that raised $32 million.
Following in close order on that action, the division of enforcement clarified that cryptocurrency exchanges selling tokens deemed securities need to be properly licensed and created a spoof website designed to demonstrate how scammers conceal the fact their tokens are securities. Then, earlier this week, Cohen received additional support when the SEC appointed SEC veteran Valerie Szczepanik as the agency's first-ever senior advisor for digital assets and innovation.
In spite of the additional support, the SEC's regulatory authority might not be enough, according to former SEC director of enforcement Andrew Ceresney, who moderated the panel. According to Ceresney, the interdependence of the regulators onstage at the event, and other government agencies including the IRS, the FBI and even state regulators, has more to do with subtly different but overlapping definitions of what is a cryptocurrency and what is an ICO.
"Securities are commodities, but by law, the primary regulator is not the CFTC, it's the SEC," said Ceresney, who retired from the SEC in 2016 and is now a partner in the New York office of Debevoise & Plimpton LLC.
"If you want the CFTC enforcement action out of your hair, go register with the SEC," he added, eliciting laughs from the audience. "That will at least limit the number of times we have to subpoena you."
For further support, Cohen needed look no further than the man to his right, Haimera Workie, FINRA's head of the office of emerging regulatory issues. "I view our role at FINRA as very complementary to the SEC," Workie said.
Workie's office is charged with analyzing trends in the securities space, especially as related to financial technology. While the SEC is a government agency, FINRA is a private-sector nonprofit organization whose broker-dealer members have been authorized by Congress to partially self-regulate.
In December 2017, FINRA released six tips to its members, including some commonsense ways to avoid being taken in by ICO fraud, and provided a point of contact to report potentially fraudulent ICO activity.
In spite of those further efforts, Workie noted an increasingly frequent frustration among regulators that the spot market for trading cash remains a gray area regulators have difficulty overseeing. "There's not really an agency that has regulatory authority over that," he said.
Echoing that concern was David Oakland, a trial attorney for the CFTC, who said his organization's oversight of the spot market is limited to an "after-the-fact mechanism." He added: "Our enforcement authority does extend to spot markets, but only in the case of fraud and manipulations," leaving little recourse for preventative measures or the creation of new protections.
So, for the time being, Oakland says, the CFTC is staying laser-focused on derivatives. "That's what we do," he said. "Any time there's derivatives embedded in the crypto assets, that's going to raise red flags for us."
Whereas SEC chairman Jay Clayton has recently and repeatedly called ICO tokens securities, firmly under the jurisdiction of his agency, the CFTC declared in 2015 that bitcoin and other cryptocurrencies are commodities. Then, last month, the CFTC released additional guidance to the burgeoning field of cryptocurrency derivatives exchanges, including enhanced market surveillance and the reporting of large-value traders.
Instead of waiting for violations of CFTC policy that could require crypto commodities exchanges to be licensed as both a Derivatives Clearing Organization (DCO) and a Swap Execution Facility (SEF), Oakland said, the agency has a system of proactively reaching out to financial technology entrepreneurs. In May 2017, the CFTC launched LabCFTC, based in Washington, D.C., as a bridge to startups that might not be able or ready to discuss formal compliance but still want to make sure they're heading in the right direction.
As this network of regulators empowered by the federal government becomes increasingly interwoven and mature, it's getting help in some surprising places. In May, the North American Securities Administrators Association revealed that 40 US state and Canadian provincial securities regulators had undertaken nearly 70 cryptocurrency investment-related inquiries.
But not everyone thinks such a regulatory framework is the right way to go. As a testament to that vocal audience member's reprimand that US regulators were confused, China banned most cryptocurrency exchanges outright at the end of last year and looks ready to go even further. On the other end of the spectrum, jurisdictions such as Estonia, Gibraltar and Singapore have attracted numerous businesses with their light-handed regulatory approach.
In the end, FINRA director Workie concluded that the trajectory toward an "umbrella" of regulation would be the most beneficial to innovators working with blockchain.
"It's the absence of any regulation that's going to stifle [innovation]," said Workie. "If you're not under some type of regulatory umbrella that regulates behavior, you're unlikely to get institutional investors."