The SEC Division of Enforcement’s 2019 Annual Report, released earlier this month, shows a continuing focus on activities involving blockchain and cryptocurrency, and its website shows an increase in cases since last fiscal year. The Annual Report provides an overview of the SEC’s enforcement activities during FY 2019, highlighting enforcement priorities and trends, noteworthy actions, and enforcement challenges. The SEC’s attention to enforcing the securities laws in the blockchain and cryptocurrency space features prominently in the Annual Report, securing special attention both in the introductory message from Division Co-Directors Stephanie Avakian and Steven Peikin, and as one of two “initiatives and areas of focus in Fiscal Year 2019” (alongside the SEC’s traditional focus on protecting retail investors).
But while Co-Directors Avakian and Peikin state that the Division’s “activities in the digital asset space matured and expanded” in 2019, the nature of its enforcement priorities as detailed in the 2019 Annual Report is not markedly different from the previous year. To be sure, the 2019 Annual Report highlights some of the more high-profile enforcement actions in the industry, such as the SEC’s ongoing case against Kik Interactive for allegedly conducted an illegal $100 million securities offering in 2017. And, as reported on the SEC website, the number of enforcement actions the SEC designates as relating to “Digital Assets/Initial Coin Offerings” has seen an uptick since last year (with 13 filed in FY 2018, and 21 in FY 2019).
One thing that the 2019 Annual Report more clearly highlights about the SEC’s activities this year is the Division of Enforcement’s attention to non-fraud violations related to cryptocurrencies. For example, the SEC charged the founder of a digital asset trading platform for operating as an unregistered national securities exchange, and charged an “ICO Incubator” and its founder for acting as an unregistered broker-dealer and selling unregistered digital asset securities. And for the first time, the SEC filed charges for the unlawful promotion of ICOs (against boxer Floyd Mayweather Jr. and music producer DJ Khaled).
With cryptocurrencies being one of the SEC’s “initiatives and areas of focus” and the fact that the Division’s Cyber Unit only became fully operational in Fiscal Year 2018, the volume of enforcement actions in this space may well continue to increase in FY 2020. Even if not, participants in the industry should be mindful that the SEC is still scrutinizing cryptocurrency activities and is able and willing to penalize non-fraud violations of the securities laws. As Co-Directors Avakian and Peikin noted in the Report: “Collectively, these actions send the clear message that, if a product is a security, regardless of the label attached to it, those who issue, promote, or provide a platform for buying and selling that security must comply with the investor protection requirements of the federal securities laws.”