The state of North Carolina issued a cease and desist order to Power Mining Pool (PMP) last week. This comes two months after a temporary cease and desist order that PMP did not respond to.
Why was the order issued?
The state found that PMP was in violation of the Securities Act by “offering unregistered securities in the form of ‘mining pool shares;’”,“offering securities while it is not registered to do so”; and “making material misstatements when offering securities”. The company purported that it owned and operated cryptocurrency mining rigs capable of mining seven cryptocurrencies, and sold mining pool shares that represented a share of the currency mined from these rigs.
In a state where digital currencies are considered securities, PMP’s activities were considered questionable, as an online business that was not registered in any jurisdiction and did not have a clear executive management and physical place of business. By not disclosing the fact that the pool shares were securities and not registered with the administrator, PMP was in breach of the Securities Act.
Are cryptocurrencies considered securities elsewhere?
Canada and the European Union (EU) are the closest comparable markets. Before considering the case’s impact for future crypto companies, let’s look at regulation in these other large markets.
As the United State’s closest neighbor, Canadian markets can be a good alternative for American companies starting in the cryptocurrency space. The Canadian Securities Administrators ruled that “cryptocurrency offerings involve sales of securities”, and that “securities laws in Canada will apply if the person or company selling the securities is conducting business from within Canada or if there are Canadian investors”.
The regulatory space for cryptocurrencies in general in the EU is more vague than regulation in other global markets. However, digital currencies may be considered financial instruments and subject to relevant legislation. Guidance from the ESMA noted that “depending on how they are structured, ICOs may fall outside of the scope of the existing rules and hence outside of the regulated space”.
What does the case mean for cryptocurrency companies in the United States?
With the rise in popularity of cryptocurrencies, the regulation of cryptocurrency companies has been a hot topic in recent years. According to Coindesk’s ICO tracker, in the month of March 2018 alone, ICOs have raised $2,158M. On a federal scale, companies offering cryptocurrencies are expected to be registered and licensed, something the PMP had failed to do.
South Carolina is one of the many states in the United States that have regulated digital currencies as securities. The cease and desist order has not changed the regulatory circumstance in the United States – the PMP case has not set a new precedent for cryptocurrency companies, be it in the United States, or other parts of the world. What it does show however, is that regulatory bodies in the United States are not afraid to act on any breaches of its legislation.
Digital currencies are increasingly becoming recognized as a form of security, and companies seeking to deal in cryptocurrency will need to treat them as such.