SEC issues warning on unregulated crypto exchanges

The US Securities an Exchange Commission (SEC) has warned investors against dealing with unregulated cryptocurrency exchanges, ahead of a significant crackdown.

The statement reads: “Online trading platforms have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings (ICOs). The platforms often claim to give investors the ability to quickly buy and sell digital assets.

“A number of these platforms provide a mechanism for trading assets that meet the definition of a ‘security’ under the federal securities laws. If a platform offers trading of digital assets that are securities and operates as an ‘exchange’, as defined by the federal securities laws, then the plaform must register with the SEC as a national securities exchange or be exempt from registration.”

The SEC goes on to say that, in order to get federal protections, investors should only trade these securities on a registered platform as a national securities exchange, ATS or broker-dealer. The danger, it says, is that many entities are presenting themselves as legitimate exchanges when they are not.

Here are the questions investors should ask as outlined by the SEC:

  • Do you trade securities on this platform?  If so, is the platform registered as a national securities exchange (see our link to the list below)?
  • Does the platform operate as an ATS?  If so, is the ATS registered as a broker-dealer and has it filed a Form ATS with the SEC (see our link to the list below)?
  • Is there information in FINRA’s BrokerCheck ® about any individuals or firms operating the platform?
  • How does the platform select digital assets for trading?
  • Who can trade on the platform?
  • What are the trading protocols?
  • How are prices set on the platform?
  • Are platform users treated equally?
  • What are the platform’s fees?
  • How does the platform safeguard users’ trading and personally identifying information?
  • What are the platform’s protections against cybersecurity threats, such as hacking or intrusions?
  • What other services does the platform provide?  Is the platform registered with the SEC for these services?
  • Does the platform hold users’ assets?  If so, how are these assets safeguarded?

“In advancing the SEC’s mission to protect investors, the SEC staff will continue to focus on platforms that offer trading of digital assets and their compliance with the federal securities laws,” the commission added.

It’s a statement that’s caused much chatter overnight in the cryptocurrency sector. Kevin Murcko, the CEO of cryptocurrency exchange CoinMetro, told CNR that “it’s about time the SEC issued something more substantial and we welcome further guidance. This statement is similar to the regulators’ approach in the early 2000s when it came to the growing and then unregulated foreign exchange market. That is to say, rather than drafting a new legislative framework around a new industry it has chosen to apply old regulations in an adhoc-manner”.

He added that “with this latest announcement, the SEC is taking securities laws – some dating back to the 1930s – and applying them to cryptocurrencies. The space is also still waiting on clear guidance on what is or is not a ‘security token’”, something Murcko believes those in the sector can help determine. “It is important that we as a community play a role in that process or we are risking getting regulated out of the very industry we helped create”.

Expect more developments in due course.

Image: BigStock