The meteoric rise of the cryptocurrency market is leaving state and federal regulators cautioning that the industry is not sufficiently protecting investors and operates “like the Wild West.”
The cryptocurrency market has grown to approximately $2 trillion, still relatively small compared to the approximately $100 trillion global capital markets industry. There are dozens of crypto platforms and at least 1,500 crypto tokens — a type of cryptocurrency representing an asset or specific use and residing on a blockchain — with at least $1 million in value.
‘It’s more like the wild west’
In comments made Aug. 3 during the 2021 Aspen Security Forum, U.S. Securities and Exchange Commission Chair Gary Gensler said decentralized cryptocurrency markets are rife with “fraud, scams and abuses,” often used by criminals to skirt laws and engage in money laundering, extortion and ransomware. Though he said there are also good actors in the marketplace, investors are not receiving sufficient information to protect themselves against the possibility of being victimized.
“It’s more like the Wild West,” he said of the cryptocurrencies market.
Gensler also called for Congress to allow for more SEC staffing to address such cryptocurrency issues, noting that even doubling or tripling current employment numbers would still not be sufficient to address the burgeoning industry. He pledged to regulate the markets as much as possible using his existing authority. He compared the need to regulate the cryptocurrency market to the safety innovations made in the U.S. auto industry.
“These platforms not only can implicate securities laws, but some platforms also can implicate commodities laws and the banking laws,” Gensler added.
The Wisconsin Department of Financial Institutions on Aug. 4 cautioned Wisconsin investors about the risks associated with interest-bearing crypto asset and cryptocurrency accounts.
“Investors should be cautious and skeptical of investment offers that sound ‘too good to be true’ or that offer guaranteed high returns with little risk. All investments carry the risk that some or all of the invested funds could be lost. High interest rates could often indicate high risks,” said DFI Secretary Kathy Blumenfeld.
According to the Department of Financial Institutions, a growing number of companies offer “deposit” account products promising to pay high rates of interest on cryptocurrency deposits. When an investor makes a deposit, they usually exchange their cryptocurrency for a promise by the issuing company or borrower for a return of the same amount of cryptocurrency plus interest whenever the investor requests a withdrawal of the invested funds or at the end of a fixed term. Cryptocurrency accounts can appear to be similar to savings accounts offered by banks and credit unions, except these interest-bearing accounts are seen as usually much riskier. Deposits made by investors are only denominated in cryptocurrency. Neither the FDIC nor any other governmental agency insures deposits in cryptocurrency interest-bearing accounts. According to the Department of Financial Institutions, cryptocurrency markets do not have access to the liquidity facilities that exist in the regulated banking system to protect depositors.