Fintechs Beware: Crypto’s Regulatory Reckoning Is Coming – Fin Tech

Since the start of the century, the finance industry has been
drifting away from traditional banking, trading, and asset
management methods and towards a more digital economy. This gave
rise to an entirely new, unchecked segment of the market that is
now booming with both legal conflict and impending regulation.
Artificial intelligence (AI), blockchain, cloud computing, and big
data are considered to be the four key areas in fintech, and these concepts support other
finance innovations currently dominating headlines like
cryptocurrencies, central bank digital currencies (CBDCs), and
decentralized finance (DEFI). As these innovations in digital
assets continue to expand, the market is now looking to regulatory
bodies to control what has evolved beyond business opportunity into
a burgeoning area for fraud and financial misconduct.

Earlier this year, The White House attempted to tame the wild
west of finance by enacting an executive order on ensuring the responsible
development of digital assets. In the time since, the government
has worked to develop frameworks that support the six key areas
outlined in the EO. So, what does this regulation look like? And
how are entities like the DOJ and SEC ensuring that fintech players
are playing fair?

A Push for Crypto Regulators to Move Faster

According to the White House, almost half of the world’s 100
most valuable fintechs hail from the United States. And in a widely
unchecked industry, this leaves room for a plethora of illicit

The new policy recommendations from the government start by
focusing on the protection of consumers, investors, and businesses.
Digital assets are typically high risk, and their value is
unstable- the current crypto global market capitalization is
approximately one-third of its November 2021 peak. This summer, we
saw just how volatile the crypto market could be as coins crashed
and non-compliance ran rampant. The Wall Street Journal reported
that “almost a quarter of digital coin offerings had
disclosure or transparency problems-like plagiarized documents or
false promises of guaranteed returns.” Further, the FBI
reported that monetary losses from scams exploded by almost 600%
from 2020 to 2021.

To combat this, the White House announced that they were
issuing guidance, increasing enforcement resources, and
aggressively pursuing fraudulent actors.” These actions
involve pushing regulators like the Securities and Exchange
Commission (SEC) and Commodity Futures Trading Commission (CFTC),
as well as entities like the Consumer Financial Protection Bureau
(CFPB) and Federal Trade Commission (FTC), to pursue investigations
and complaints that indicate unlawful activity in the digital asset
space. Further, the Financial Literacy Education Commission (FLEC)
will lead efforts to educate consumers on the risks of digital
assets and what to look out for when it comes to misconduct.

Additional highlights from the fact sheet include the
focus on promoting access to safe, affordable financial
; fostering financial stability; advancing
responsible innovation
; fighting illicit finance;
and exploring a U.S. Central Bank Digital Currency

While the regulatory action outlined in the fact sheet provided
great insight into the plans for standards in the space by the
federal government, that doesn’t mean that the aforementioned
entities are actually acting- yet. In fact, many
government officials have been calling on these regulatory bodies
to move faster as more conflicts around digital assets like
cryptocurrencies creep into court.

The DOJ’s Crypto Crackdown

While President Biden and his team have been working hard to set
up these frameworks, the Department of Justice (DOJ) has been
working even harder to prosecute those acting illicitly. They have
been cracking down on recent illegal activity in the space, and
even announced the creation of the Digital Asset Coordinator Network (DAC) this
past month, which is aimed at combatting “the growing threat
posed by the illicit use of digital assets to the American
public.” This was prompted by President Biden’s crypto
executive order and will be led by the Justice Department’s
Cryptocurrency Enforcement Team consisting of more than 150 federal
prosecutors looking to act against crypto criminals. But the DOJ,
SEC, and more are already moving the wheels on curbing corruption
in the industry.

Looking to Litigation

While these regulatory actions look to limit litigation in the
fintech space as innovation in the market expands, there has
already been a slew of cases involving digital currencies that have
taken the legal world by storm. The SEC and DOJ have been bringing
crypto fraud enforcement to headlines, charging former Coinbase
employees with insider trading schemes and prosecuting celebrities
like Kim Kardashian for federal securities
These actions come after the DOJ’s first-ever
charge for an insider trading scheme involving NFTs on Opensea, and a slew of probes into
companies like Binance to provide records about the
cryptocurrency exchange platform’s anti-money laundering
checks. Additionally, on the horizon are more revelations involving
Forex platforms conducting Ponzi schemes to bilk targeted investors
of their assets-take SEC v. Mauricio Chavez, et al, as a
recent example.

As regulatory action ramps up and the SEC and DOJ alike make
things like insider trading and illicit asset management their
priority, businesses should be taking note of these conflicts and
begin evaluating their processes for inconsistencies. Those in the
space must consider the risks involved with digital currency and
prepare themselves for a more tightly regulated fintech future
before it’s too late. Lawyers have already filed 58 securities class action lawsuits against
crypto companies, with more than a third coming since 2020.

Engaging with experts early in the litigation process can help
firms uncover questionable or potentially illegal practices
happening under their noses. And with the legal need in the digital
assets market expanding fast, a highly-credentialed expert witness
can help address issues that enable firms to extricate themselves
before they get indicted in a conspiracy.

Originally published October 19, 2022

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