Goldman Sachs dipped its toes into the cryptocurrency waters, becoming the first major U.S. bank to trade crypto over the counter this week. It is trading a bitcoin-linked instrument called a non-deliverable option with crypto merchant bank Galaxy digital. Since the Goldman entry into Crypto was announced various pundits have speculated that other banks will begin making cryptocurrency offerings and that this is likely to become mainstream in a fairly short time.
The analysis offered by some is that if major banks enter the crypto markets, their more traditional regulatory requirements, including the Bank Secrecy Act requirements, will reduce risks inherent to cryptocurrencies. If that is true, the SEC could have a lesser role in crypto oversight and the Treasury Department and DOJ would enforce money laundering regulations and instances of clear violations. But that assumes that the risk models will show the volatility reducing and not increasing. Those patterns are unlikely in the next decade, based on data on crypto trading today.
The volatility and risks in cryptocurrency are significant and increasing. A growing number of the general public are being victimized by a worldwide criminal element that takes advantage of the secrecy afforded by the blockchain and its international mechanisms. Cryptocurrency crime hit a record high in 2021 and one report stated that scammers took $14 Billion worth of crypto last year. The different crypto scams so far include: 1) Requiring payment only in cryptocurrency. Most institutions aren’t accepting crypto. Demands such as these are likely scammers. 2) Digital collectibles involve selling newly minted digital coins. There is no federal regulation unlike bank accounts or fraud insurance or FDIC protection on the blockchain.
The actual extent to which the mass crypto investors are being hurt is not known with precision but the concern is growing in Congress over the lack of oversight of the cryptocurrency world is impacting a growing number of Americans caught up in the excitement. In 2021, SEC Secretary Gary Gensler gave a speech at the Aspen Institute in which he said… “Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West. This asset class is rife with fraud, scams, and abuse in certain applications. There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information.”
In 2019, the SEC filed a case against The Telegram Group to stop it from distributing “Grams,” a new cryptocurrency at the time. A year later, after a year of litigation, the Court Ordered the company enjoined for their activities including the sale of cryptocurrency. For anyone interested in cryptocurrency regulation, it is a worthwhile read. SEC orders Telegram Group to give back $1.2 Billion to investors for unregistered digital tokens and pay $18.5 million penalty The Judge wrote that Telegram’s goal was to sell Grams as the “first mass-market currency.” He added that the public “needs the protection of the Securities Act…” See Judge Castel’s Order: https://law.justia.com/cases/federal/district-courts/newyork/nysdce/1:2019cv09439/524448/227/
The Wild West analogy is apt here and the entry of traditional banks as well as others selling and buying cryptocurrency is unlikely to reduce the risk. Rather the more purchases and sales that are made, the higher the risk and the SEC oversight will likely need to increase rather than decrease.
JEFFREY NEWMAN REPRESENTS WHISTLEBLOWERS INCLUDING SEC WHISTLEBLOWERS. HE CAN BE REACHED AT 617-823-3217 jeff@jeffnewmanlaw.com
