SEC warns investors of cryptocurrency risk

The U.S. Securities and Exchange Commission is warning investors to "exercise caution" in respect of cryptocurrencies such as bitcoin, reminding them that they may not be able to recoup any lost investments

What has happened?

The U.S. Securities and Exchange Commission (SEC) has warned that investors should "exercise caution" with cryptocurrencies such as bitcoin, noting that these are "now being promoted more as investment opportunities than efficient mediums for exchange".

What does this mean?

The statement by SEC Chairman Jay Clayton and Commissioners Kara Stein and Michael Piwowar also notes that many promoters of initial coin offerings (ICOs) and other cryptocurrency investments are not abiding by federal and state securities laws.

State and federal regulators will not always be able to recover any lost investments, the statement cautions.

"The SEC and state securities regulators are pursuing violations, but we again caution you that, if you lose money, there is a substantial risk that our efforts will not result in a recovery of your investment."

The statement was issued in support of a similar warning by the North American Securities Administrators Association (NASAA), which cautioned "main street" investors about investments involving cryptocurrencies.

The NASAA statement encouraged investors to look “beyond the hype” when considering cryptocurrencies and their derivatives, to better understand the associated risks.

Joseph Borg, NASAA President and Director of the Alabama Securities Commission, said:

“Investors should go beyond the headlines and hype to understand the risks associated with investments in cryptocurrencies, as well as cryptocurrency futures contracts and other financial products where these virtual currencies are linked in some way to the underlying investment.”

The statement also noted the volatile nature of the cryptocurrency market.

“The recent wild price fluctuations and speculation in cryptocurrency-related investments can easily tempt unsuspecting investors to rush into an investment they may not fully understand,” Borg said.

The NASAA statement ends with a list of common concerns associated with cryptocurrencies and red flags to look out for.

The warnings by the regulators follow other recent SEC warnings on the same issues as well as similar warnings by global regulators, from Singapore and Japan to Germany and the UK.

In December 2017, Chairman Clayton issued a personal statement aimed at “main street” investors and market professionals, warning them of the potential risks of investing in cryptocurrencies.

A month before, the SEC warned issuers of digital tokens that raise funds through ICOs to expect enforcement action if they fail to comply with the applicable regulatory requirements in the US.

Next steps

If you want to take advantage of blockchain's huge potential and disruptive impact, while avoiding falling foul of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.

Theodore Mlynar
New York
Gregory Lisa
Washington D.C.


© 2020 Hogan Lovells. All rights reserved. "Hogan Lovells" or the “firm” refers to the international legal practice that comprises Hogan Lovells International LLP,Hogan Lovells US LLP and their affiliated businesses, each of which is a separate legal entity. Attorney advertising. Prior results do not guarantee a similar outcome.