David Silver is the founder of Silver Miller, a plaintiffs’ law firm that brings cases against cryptocurrency exchanges and investment offerings. The views expressed here are his alone. You can reach him at DSilver@SilverMillerLaw.com.

I’m late, I’m late!

For a very important date!

No time to say “Hello.”

Goodbye!

I’m late! I’m late! I’m late!

When the White Rabbit was late in “Alice in Wonderland,” he rapidly scampered off to meet his appointed duties. In the wild and rapidly-evolving Wonderland of cryptocurrency, government regulators are quickly ramping up their efforts in fulfillment of their appointed duties, though the current regulatory framework still limits them in that regard.

That’s the clear takeaway from last week’s Senate Banking Committee hearing on cryptocurrency, where the heads of the two main financial market regulators testified.

If they weren’t already, cryptocurrency exchanges and promoters of initial coin offerings (ICOs) are now on notice: people who invest with them are entitled to be treated like all other investors in the U.S.

Exchanges that want to proclaim they are legitimate and that they follow all U.S. laws need to act like it when something goes wrong. ICO promoters who want to sell a product and raise funds by crowdsourcing crypto need to disclose all information accurately, transparently, and deliver on the product they sold.

If they don’t, they need to face the consequences of their actions.

I agree wholeheartedly with Securities and Exchange Commission Chairman Jay Clayton’s public statements over the past few months criticizing ICOs and the people behind those fundraisers.

“I believe every ICO I’ve seen is a security,” he told the Senate committee. It is almost as if he read my CoinDesk 2017 Year In Review article “I Love Bitcoin. That’s Why I Sue Exchanges,” wherein I said there has yet to be an ICO that did not perform that was not a security.

Clayton went on to condemn the promoters, attorneys and other related professionals who flout federal securities laws by putting the form of their offerings over the substance of what they really are: investments, stating, “We should regulate [ICOs] like we regulate securities offerings. End of story.”

ICO companies and their legal counsel should be scrambling over their past tone-deaf responses to investors. These entities need to take responsibility and not blame the people who sent them money. Legal loopholes are not designed to punish innocent people who were deceived.

Listening to the hearing testimony, it is also clear that squarely within the regulators’ crosshairs – and an area in which enforcement actions are on the near horizon – are cryptocurrency exchanges.

“When you have an unregulated exchange, the ability to manipulate the prices goes up significantly,” Clayton told the lawmakers.

Those comments were echoed by his counterpart at the Commodity Futures Trading Commission Christopher Giancarlo, who told the committee:

“Any proposed federal regulation of virtual currency platforms should be carefully tailored to the risks posed by relevant trading activity and enhancing efforts to prosecute fraud and manipulation.”

Market manipulation

Because each exchange makes its own independent and unregulated market for the cryptocurrency traded on its platform, the threat of market manipulation constantly hovers over its activities. Account holders at the exchange have no protections against the exchange suddenly slashing a cryptocurrency’s value without notice.

Even today certain exchanges admit their systems don’t work, but claim that doesn’t matter. While lawyers for these exchanges claim it’s within the legal rights of these exchanges to do so, those lawyers should know that legally and ethically they’re wrong.

Just as certain law firms believed in 2015 and 2016 that there was such a thing as a pre-functional utility token, almost all lawyers and regulators believe that not to be true today. What’s changed? My firm and others started filing lawsuits.

Similarly, most crypto investors are familiar with “flash crashes” and oversized liquidations that have caused crypto values to plummet on individual exchanges while those same cryptocurrency values remained unaffected on other exchanges at the same time.

In instances such as those, exchanges have disavowed responsibility for any possible market manipulation and simply shrugged off the incidents as “part of the game” while account-holders suffered devastating losses with little to no recourse.

The exchanges would like that to be the end of the story. However, an exchange that permits trading – especially leveraged transactions – has real responsibilities to its account holders and should be held accountable when it allows or causes massive amounts of value disappear in an instant on the exchange while no such impact is felt elsewhere.

The SEC and CFTC are clearly moving in that direction, though it is entirely unclear when they might reach their destination.

The overseers are rapidly making their way to fulfill their appointed duties in the cryptocurrency Wonderland, even if – like the White Rabbit – they arrive a little bit late. Better late than never, I say.

Clocks via Shutterstock