What can crypto investors learn from NVIDIA? This tech company was heavily fined for failing to disclose its revenue sources as associated with cryptocurrency mining. NVIDIA created graphics processing units originally identified as gaming-related.
The fact that the company earned significant revenue from these units presumably repurposed for crypto mining wasn’t the issue. Failing to disclose such information to investors, on the other hand, cost the company some $5.5 million in fines. Why are these disclosures necessary, and what can we learn from NVIDIA?
You could be forgiven for glancing at an article discussing the NVIDIA fine and assuming it was related to a failure to disclose certain crypto earnings on federal taxes.
But the reality of this particular situation had to do with telling investors the company was active in crypto or the associated potential risks with doing so. NVIDIA didn’t get into trouble with the IRS, but rather with the U.S. Securities and Exchange Commission (SEC).
Cryptocurrency investing is incredibly volatile. Because of this, the SEC holds that not informing investors of the repurposed use of their products amounted to a “disclosure failure” that deprived investors in the company of information that may have changed how they chose to invest.
If you fail to disclose your business dealings in what the SEC deems a “key market” that could, depending on circumstances, be viewed as either negligence (not informing potential investors of a potential risk of loss as a company that does business with the crypto industry) or deceptive (actively trying to prevent investors from learning about the risks).
The SEC issued a cease-and-desist order to NVIDIA, and issued a press release announcing its findings. They include NVIDIA operating for consecutive quarters during FY 2018 without disclosing crypto mining was “a significant element of its material revenue growth from the sale of its graphics processing units (GPUs) designed and marketed for gaming.”
The SEC press release alleges that NVIDIA had “omissions of material information about the growth of its gaming business” the SEC felt were misleading due to NVIDIA’s other statements “…about how other parts of the company’s business were driven by demand for crypto, creating the impression that the company’s gaming business was not significantly affected by cryptomining.”
The SEC ruled NVIDIA was guilty of violations of the Securities Act of 1933 and the disclosure provisions of the Securities Exchange Act of 1934. NVIDIA agreed to the $5.5 million fine but did not admit to wrongdoing.
We have said it many times here; cryptocurrency is still, at press time, largely unregulated compared to other investment opportunities.
And when companies that ARE federally regulated (by the SEC in this case) behave more like their unregulated crypto counterparts, you get news stories like these. Sometimes they are the result of mistakes, omissions, or simply due to the fact that this industry is so very new compared to stocks, bonds, and traditional investing.
But there is also a high potential for fraud. The SEC exists to prevent companies from gaming the system, pretending to be something other than they really are, and to prevent workarounds that profit insiders and leave the casual investor holding the bag. NVIDIA may not have set out to misrepresent itself but in the eyes of the SEC, the intent was not the point.
What can crypto investors learn from NVIDIA? There are a few issues to consider. The first is that with every SEC press release such as the one we’ve discussed here, the entire crypto industry gets closer to being specifically regulated in America.
When those regulations come, and they WILL come eventually, the real question is how those new rules will hinder the industry. Suppose that U.S. regulators decide that crypto is legal tender, for example.
That is far-fetched and not likely, but as a thought experiment, it’s important to think through the consequences of any such far-reaching legislation. If you haven’t asked yourself what the damage any serious federal regulation might cause to the current crypto economy, you haven’t been paying attention. And your investments are extremely vulnerable as a result.
The SEC demonstrated the reality of crypto–it’s all fun and games in an unregulated market until an alphabet soup agency steps in.
The HODLers and true believers might want you to believe in “unicorn crypto” that has no constraints on it forever and ever. But that isn’t the reality of the situation. The unicorn is being hunted, and the SEC decision we’ve talked about here is evidence. It doesn’t matter if it’s a target of opportunity or something closer to an organized effort.
There are some involved with crypto who treat it more like a cult than a financial opportunity. And that is fine, until the day that it’s no longer viable.
Cryptocurrency is likely here to stay, but what the crypto ecosystem will look like in 5 or even 10 years remains to be seen. Regulation has the potential to wipe out huge swaths of (virtual) wealth overnight. That could come from any number of angles, too.
The government could choose not to regulate crypto directly in the short term; it could choose to regulate crypto mining operations instead. What would happen if there was a carbon offset tax levied on crypto miners? That could seriously change gas fees, transaction fees, and crypto mining operations in general.
The so-called specter of federal regulation carries other potential changes. Some of them are actually good. A significant reduction in fraud risk due to federally-required Know Your Customer policies, for example, is one outcome.
Or the government could choose to simply ignore the problem in favor of more pressing issues. For now. At the end of the day, the crypto ecosystem you know and love right now may not be the same one operating a year, two years, ten years from now. Anticipating the regulatory clampdown ahead of time will make all the difference for some crypto investors and projects.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.