Bitcoin

As the bitcoin boom accelerates, so does scrutiny from regulators

The Securities and Exchange Commission in Washington.
Jim Bourg | Reuters

The rapid surge in bitcoin has prompted Washington to take a closer look at digital currencies and the rise of initial coin offerings — a method used by internet entities to raise capital in exchange for a new cryptocurrency.

The SEC said it is devoting more resources towards its new minted Cyber Unit to monitor digital currencies, specifically on violations involving "ledger technology and initial coin offerings."

Just this week the SEC froze assets of Plexcoin, which raised $15 million dollars in an initial coin offering by falsely promising a 13-fold profit in less than a month.

This was the first high profile case the SEC has handled within the broader ICO space but will likely not be the last.

Former SEC Commissioner Paul Atkins told CNBC that whenever you have money "sloshing around, you have criminals that are attracted to it."

Another active voice in this space is Kathryn Haun, former cryptocurrency director at the Department of Justice and current board member of exchange Coinbase, who recently testified in front of the Senate judiciary committee.

"But I think the real action in the ICO space with the SEC is yet to come: I predict we'll see some large enforcement actions in the coming year. That said, because the SEC cannot bring actions against every single ICO that does not comply with the securities laws, they'll want to choose those that will pack the most deterrent punch, so instances where massive amounts of money was raised but also where investors may have lost money will provide the most natural targets," said Haun to CNBC.

Beyond the SEC, other government agencies are monitoring bitcoin activity.

The US Treasury Department has been reviewing how the Finance Crimes Enforcement Network — FinCEN — is addressing money laundering and terrorist activity that involves virtual currencies.

Another agency bitcoin investors could hear from is the the Internal Revenue Service. Last week, the IRS demanded account information for over 14,000 users.

One bitcoin investor said to CNBC: "The IRS is trying to send a strong warning to bitcoin holders that any profits on bitcoin are considered taxable income."

However Haun says the IRS did not even recognize bitcoin and cryptocurrencies until three years ago.

"Interestingly, the IRS subpoena seeks information dating back to 2013, even though it wasn't until 2014 that the IRS put out any guidance on how cryptocurrency should be treated for federal tax purposes. That whole question is still a bit unclear in the minds of many, but the IRS has said that it views cryptocurrency as property for tax purposes," said Haun.

Growing number of former regulators who spoke to CNBC said more action is coming from one or all of the agencies. However the goal is not to shutdown bitcoin, at this point, experts say its to find the bad characters that are using cryptocurrencies to fund illegal activities and/or are committing fraud with initial coin offerings.

So while bit coins rise continues, regulatory hurdles could make investing in this space more challenging.

"Investors need to be wary and try to do their homework putting their money in," said Atkins.

Correction: Kathryn Haun is former cryptocurrency director of the Department of Justice and current board member of exchange Coinbase. An earlier version misspelled her last name.