SEC head warns investors about cryptocurrency

The head of the Securities and Exchange Commission (SEC) is cautioning investors about putting money into cryptocurrencies in one of the SEC’s strongest statements to date on the matter.

SEC Chairman Jay Clayton warned investors to be wary of promises of “fortunes” from cryptocurrencies’ rapid rise in value and to be skeptical of the refrain that “this time is different.”

“A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation,” Clayton said on Monday, referring to the initial coin offering (ICO) market.

Clayton did not specify any cryptocurrencies by name, but attention in the past several months has focused primarily on Bitcoin, Ethereum and Litecoin, several of the largest cryptocurrencies by market capitalization and the only three cryptocurrencies available on Coinbase, the largest platform for trading such currency. Their values have skyrocketed in the past week.

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Cryptocurrency supporters and evangelists argue that Bitcoin and many other digital currencies have unparalleled security making fraud difficult, but some markets are still ripe for manipulation.

Forty percent of Bitcoin is held by roughly 1,000 individuals. The second largest digital currency, Ethereum, is controlled by an even smaller amount of investors. Concentration is tighter among smaller, lesser known tokens.

This concentration makes currencies vulnerable to rapid swings should small groups of powerful investors decide to collude to manipulate markets.

Smaller investors who are out of the loop can get caught up in such massive fluctuations. SEC law also doesn’t prohibit this in the same way it does for securities.

Clayton noted that this lack of regulation, in addition to cryptocurrencies’ ease of transfer between countries where the SEC lacks jurisdiction, means the agency “may not be able to effectively pursue bad actors or recover funds.”

He noted though that such currencies still offer potential upsides so long as investors are responsible.

“I believe that initial coin offerings — whether they represent offerings of securities or not — can be effective ways for entrepreneurs and others to raise funding, including for innovative projects,” he said.