New leader of state regulators places emphasis on 'risky' digital assets

The new leader of state securities regulators said states have an important role to play in protecting investors from the potential dangers of digital assets.

Cryptocurrency, non-fungible tokens and other assets created by blockchain technology have been praised as innovations making financial markets more dynamic but also have been the source of ripoffs and collapses that have harmed investors and drawn intense regulatory scrutiny.

Claire McHenry, deputy director of the Nebraska Department of Banking and Finance Bureau of Securities, said there is a place for digital assets in regulated markets but “exactly what that looks like and how that regulation develops is a matter of debate at the moment.”

State regulators and the organization representing them – the North American Securities Administrators Association – should be at the heart of evolving oversight of digital assets, said McHenry, who became NASAA’s president Tuesday.

“At NASAA, we understand that for retail investors, these products and markets remain a very risky place,” McHenry said in the prepared text of her presidential inaugural speech at NASAA’s annual meeting in San Diego. “State regulators have been and will continue to be on the front lines of this issue.”

State regulators “will explore ways to expand our ongoing communication and information sharing with our fellow regulators” over the next year, McHenry said. “And we will maintain active engagement with policy makers to ensure that states retain the tools necessary to protect investors and facilitate responsible capital formation and innovation.”

Coordination among states on the regulation of digital assets would be a step in the right direction, said Andy Balthazor, an associate at the law firm Holland & Knight. Each state takes its own approach. New York is probably the most active and has established licensing requirements for digital-asset companies.

“Right now, there’s a hodgepodge of different regulations,” said Balthazor, who heads up his firm’s digital assets and blockchain tech team. “Having clear, more uniform rules amongst the different states would be welcome.”

The regulatory clarity would allow digital asset providers to “operate without the fear of the unknown,” Balthazor said.

The NASAA conference in San Diego focused on how the role of regulators has evolved as emerging technologies have changed the capital markets and securities industry, McHenry said.

Digital assets were “once a novelty” but are now used routinely to make trades, invest and make purchases, McHenry said.

“More and more, investors have come to rely on smartphones and apps to make investments and interact with financial professionals,” McHenry said. “But with these advances, we often see real and meaningful risks especially when these technologies and products intersect with large segments of the investing public. With this expanded reach to new investors, new products and services must come with appropriate controls and backstops.”

She said NASAA enforcement statistics show an increase in scams involving digital assets and digital platforms.

“This has been especially the case in frauds targeting older investors,” McHenry said.