The Use of Virtual Currencies by Bad Actors
Because virtual currencies are not overseen or managed by a
central bank or government, many participants expect that virtual
currency transactions are free of government oversight. This is
a false assumption due to the regulatory issues discussed below.
However, it did result in the notorious use of Bitcoin and other
virtual currencies by criminals of various kinds, including most
famously the dark cyber-underworld website known as the “Silk
Road” ( en.wikipedia.org/wiki/Silk_Road_(marketplace)).
The use of virtual currencies by such bad actors has caused
some to shun any participation in virtual currency markets (www.
finder.com/why-people-arent-buying-cryptocurrency). In addition, there have been some significant instances of virtual currency
theft reported. 6 Paradoxically, the distributed ledger inherent in
the blockchain technology underlying all virtual currencies essentially results in a permanent record of ownership that could
make certain criminal activities easier to trace.
What are the Biggest Regulatory Issues
with Virtual Currencies & ICOs?
SEC and CFTC Regulation. Regulation of virtual currencies,
ICOs and token activity in the United States by the Commodities Futures Trading Commission (CFTC) and the Securities and
Exchange Commission (SEC) is probably the most important
virtual currency issue financial institutions face today. Although
the CFTC primarily regulates commodities futures activities, it
does regulate against fraud in the underlying commodities spot
markets. The CF TC’s authority to regulate cryptocurrency-related
fraud activity was confirmed in a recent federal district court ruling. 7 The CFTC has also successfully pursued regulatory action
against cryptocurrency trading platforms. 8 On July 16, 2018, the
CFTC issued its fourth advisory about virtual currencies, warning customers to use caution and do extensive research before
purchasing virtual coins and tokens. 9
The SEC has concluded that certain tokens (and possibly
certain virtual currencies) could be characterized as securities
for purposes of securities regulation. 10 Significantly, in 2017 the
SEC issued a report concluding that DAO tokens were securities
subject to SEC regulation. 11
Subsequent remarks from SEC officials have chilled the market
because the agency has made it clear that tokens and cryptocurren-
cies can, depending on the facts, be considered securities subject
to SEC regulation, and that commodity and security classification
are not mutually exclusive ( www.sec.gov/news/public-statement/
statement-clayton-2017-12-11). Note that in June 2018, SEC Di-
rector of Corporate Finance William Hinman made it clear that
Ethereum was likely not considered a security and therefore not
likely subject to SEC regulation. However, the speech also stated
that other cryptocurrencies and tokens could be considered se-
curities ( www.sec.gov/news/speech/speech-hinman-061418).
In addition, the SEC issued an alert in March 2018 that trading platforms and others participating in the sale of tokens and
virtual currencies that are considered securities are subject to
SEC regulation and registration as securities exchanges unless
an available exemption applies. 12 As a result, Coinbase and other
virtual currency exchanges are considering registering as securities exchanges with the SEC (
The Federal Trade Commission has also begun regulating
cryptocurrency and blockchain activities. 13 The treatment of ICO
tokens (and possibly certain cryptocurrencies) as securities subject
to SEC regulation and related exchanges being subject to SEC
regulation, are the most chilling aspects of the current regulatory
climate. Nevertheless, ICOs raised more money in the first three
months of 2018 than the whole of 2017 ( www.coindesk.com/6-
3-billion-2018-ico-funding-already-outpaced-2017). This suggests a conflict in market behavior and regulation that will likely
result in new disruptive guidance and enforcement actions in 2018
and beyond. Financial institutions should consider the potential
risks and liabilities of participating in virtual currency and ICO
and token activities given the statements of the CFTC and SEC.
FINRA Regulation. FINRA is the largest independent regulator
of U.S. securities exchanges, firms, participants and employees.
Banks that operate as brokers or as securities advisory firms can
be subject to FINRA oversight ( www.finra.org/newsroom/2011/
As discussed above, certain cryptocurrencies or tokens could be
treated as securities under federal securities laws. On July 12,
2018, FINRA issued Notice 18-20 ( www.finra.org/industry/
notices/18-20). The notice asks FINRA member firms “to promptly
notify it if it, or its associated persons or affiliates, currently engages,
or intends to engage, in any activities relating to digital assets,
such as cryptocurrencies and other virtual coins and tokens.” As
a result, banks that participate, change or intend to participate in
the cryptocurrency and token markets should consider whether
FINRA notification is appropriate in light of the notice.
On March 18, 2013, FinCEN (the U.S. Financial Crimes Enforce-
ment Network) released guidance regarding the application of
FinCEN regulations in the context of virtual currencies (www.
fincens-regulations-persons-administering) Importantly, the
guidance provides that “an administrator or exchanger that ( 1)
accepts and transmits a convertible virtual currency or ( 2) buys
or sells a convertible virtual currency for any reason is a money
transmitter under FinCEN’s regulations…”
In March 2018, FinCEN issued a letter to Senator Wyden con-
cluding that developers and exchanges participating in ICOs and
Given the heightened attention, bank
directors, leaders, managers, and those
in compliance roles need to understand
virtual currencies, ICOs and tokens, and
the important regulatory risks.