For many investors, the market for bitcoin and other cryptocurrencies is the financial equivalent of the Wild West, with plenty of outlaws and few sheriffs to prevent illegal market manipulation. Several recent events seem to underscore these concerns.
Coinbase Wednesday halted bitcoin cash transactions amid concerns about insider trading after prices unexpectedly surged ahead of Coinbase's announcement that it would accept the token. Bitcoin cash prices hit $8,000, more than double their level from a day earlier, before settling to their current level of around $3,844.
The price hike caught Brian Armstrong, CEO of Coinbase, the largest U.S. bitcoin exchange, by surprise since it violated company policies. He has ordered an internal investigation and has promised that he won't "hesitate to terminate" any offenders and take "appropriate legal action."
Earlier this week, the U.S. Securities & Exchange Commission halted trading in the shares of Crypto Co., a small digital currency company whose 2,700 percent rise in less than three months has made its founders billionaires on paper. The SEC is concerned that investors may not be getting accurate financial information on the money-losing Malibu, California-based company.
Before the recent trading halt, Crypto Co. had a market capitalization of about $12 billion, four times the $3 billion valuation of the New York Times Co. (NYT). A Crypto Co. official didn't respond to a request for comment.
SEC Chairman Jay Clayton is urging investors to be cautious when buying cryptocurrencies since they're largely unregulated. To date, the agency hasn't registered any initial coin offerings (ICOs), which are marketed as being similar to initial public offerings for stocks, nor has it registered exchange-traded funds that claim to hold the tokens.
"Your invested funds may quickly travel overseas without your knowledge," Clayton said in a statement. "As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds."
On the other hand, Goldman Sachs (GS) is becoming the first major Wall Street institution to set up a bitcoin trading desk. Bloomberg reported that Goldman is building a team in New York but hasn't yet decided where in the firm to locate the group. It may be running by the end of June, Bloomberg said.
Said Jacob Frenkel, a former federal prosecutor and SEC enforcement attorney: "What we're seeing in cryptocurrency is a version of what we saw with the dot-com boom and allegations of manipulation of securities 25 years ago. The offering may change, but the techniques are the same. From a government enforcement perspective, fraud is always fraud."
According to Blake Estes, an attorney with Alston & Bird's financial services practice, cryptocurrency investors don't enjoy the consumer protections that other investors take for granted. Many legal issues about the sector have yet to be resolved, he noted.
"There is a heightened risk of market manipulation in the crytocurrency markets because of the uneven flow of information about certain cryptocurrencies," he wrote in an email. "Whereas the SEC has mandated minimum disclosure requirements for issuers in the public securities markets, and federal authorities have aggressively prosecuted those who have allegedly violated the insider trading rules, these regulatory frameworks have not yet been applied to the cryptocurrency markets, in which it is still unclear which instruments are securities and which are not."
Also raising eyebrows was litecoin founder Charlie Lee's announcement that he had liquidated all his holdings of the cryptocurrency so that he can comment on its price without fear of being accused of trying to improperly manipulate it. On Twitter, he rejected comparisons between his actions and a CEO of a publicly traded company unloading all of his shares.
"I'm the creator. Litecoin is like my kid," he wrote. "I'm more invested in it than someone holding 1MM LTC. For me, it was never about the money."
Lee's explanation didn't ring true with investor David Drake, founder and chairman of LDL Capital, who says he has a multimillion dollar investment in cryptocurrency.
"It's a tough situation," said Drake, who doesn't own litecoin. "He's the founder. He owns it, but he promotes it. ... Using the excuse that he got rid of it not to be fired for promoting it is bull. ... He cashed out in my book."
Lee, however, is vowing to continue to be involved with litecoin, saying on Twitter that he was "rewarded in lots of different ways, just not directly via ownership of coins." Lee didn't elaborate further and didn't respond to an email requesting comment.