My home state of North Carolina popped up in the news the other day for issuing a cease and desist order to PowerMining Pool, a European company that allows users to partake in the profits of their mining operations in exchange for an initial “investment” of Bitcoin. As we move further into 2018, and the topic of regulation in the cryptocurrency and blockchain industries becomes ever more relevant, this is a fantastic example of governments around the world trying to take a more active stance. Especially in the United States, working within the federalist system and multiple levels of government, it’s especially interesting to see how the states are taking unilateral action without involving the SEC or the federal government directly.
To understand why the state government in North Carolina shut down the local operation of PowerMining Pool, it’s important to understand the basic legal framework of incorporated companies. In any legal entity such as an LLC, the company is divided into shares that are outlined in the legal documents submitted to the Secretary of State when the company incorporates. These shares are considered “registered shares,” and are legal rights to the property and revenue controlled by the attached company; they are also subject to regulations outlining the sale and transaction of shares of companies, much like the sale and transactions of stocks (which are also shares of a company at a basic level) are regulated by the SEC.
The short story is that by advertising a profit sharing scheme based on initial investments by the customer, the State of North Carolina found that PowerMining Pool was essentially selling unregistered “shares” of the company. They deemed the rhetoric and promises of “instant passive income from your investment” to be illegally advertised and promoted, and a direct threat to the financial security of the State’s citizens. In response, the State of North Carolina issued an immediate cease and desist order, which PowerMining Pool will have to comply with unless they want to fight a drawn-out legal battle with financial lawyers.
The point of this story is two fold: the first is to highlight the advancing willingness of local and national governments around the world to intervene in the cryptocurrency space, which they have previously been unwilling and/or unable to effectively do. As crypto continues to gain more mainstream traction, the regulatory activity such as that enacted by North Carolina will certainly continue to rise.
The second point of this story is to remind us that financial regulations can be an important part of a healthy economy, especially when not everyone who participates is educated in basic finance and/or risk management. It’s easy for people to get wrapped up in false promises of “quick and easy passive income” from nicely-packaged marketing campaigns. And while not all of these opportunities are malicious by any means, it seems like the State should have the ability to protect average consumers from financial scams by laying out and enforcing basic good-practices for companies that deal directly with personal finance.
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