The United States Securities and Exchange Commission (SEC) issued a statement today on “online trading platforms” or cryptocurrency exchanges that trade in tokens minted by Initial Coin Offerings (ICOs) and other digital assets.
Here’s the core of the SEC’s statement:
“The platforms often claim to give investors the ability to quickly buy and sell digital assets. Many of these platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data. 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 platform must register with the SEC as a national securities exchange or be exempt from registration. The federal regulatory framework governing registered national securities exchanges and exempt markets is designed to protect investors and prevent against fraudulent and manipulative trading practices.”
You can view the full statement at SEC.gov here.
This statement shouldn’t come as a surprise to anyone. Basically, the SEC is stating that any online platform that trades cryptocurrencies shall be defined as a national securities exchange, which means it’s required to register and comply with existing regulations.
However, the statement does indicate a further willingness of the SEC to crack down on cryptocurrency exchanges. Many major crypto exchanges are unlicensed. Instead of seeking licensure in the United States, many exchanges simply block American registrations.
The SEC has also issued dozens – or perhaps even hundreds – of subpoenas to issuers of ICOs and to “gatekeepers”. The SEC has been messaging unregulated exchanges for some time. Meanwhile, they’re also encouraging investors to only trade in digital assets that represent securities using regulated exchanges, alternative trading systems, or brokers.
The SEC also has a problem with the way in which cryptocurrency exchanges market themselves online. Many of these exchanges claim to be regulated and approved – yet they’re not. Other exchanges claim to only list high-quality, handpicked digital assets, suggesting to investors that the assets are approved or regulated – yet again, they’re not:
“Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges. Likewise, the SEC does not review the trading protocols used by these platforms, which determine how orders interact and execute, and access to a platform’s trading services may not be the same for all users.”
Any exchange that trades securities in the United States is required to register as a national securities exchange or operate under an exemption from registration – like the exemption provided for alternative trading systems (ATSs) under SEC Regulation ATS. Any other national securities exchange must comply with federal securities laws and must file its rules with the SEC.
In any case, the SEC is encouraging market participants to consult with legal counsel while also reaching out to SEC staff regarding any questions they might have about regulations.
The SEC is Encouraging Investors to Ask Questions Before Trading Digital Assets Online
As part of the SEC’s recent statement, they posted a number of questions investors should ask before deciding to trade digital assets on an online trading platform:
- Can you trade securities on this platform? If so, is the platform registered as a national securities exchange? (you can view the SEC’s list of registered securities exchanges here)
- 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? (you can view the list of alternative trading systems here)
- Does FINRA’s BrokerCheck tool have any information about the individuals or firms operating the platform?
- Who is allowed to trade on the platform?
- How does the platform decide which assets to list?
- How does the platform set prices?
- What kinds of fees are charged by the platform? What are the trading protocols?
- How does the platform safeguard users’ trading and personally identifiable information?
- How does the platform protect against cybersecurity threats like hacking or intrusions?
- What other services are provided by the platform?
You can view the entire SEC statement on potentially unlawful cryptocurrency exchanges here. This shouldn’t have a major impact on the industry – but it does illustrate a willingness by the SEC to continue cracking down on cryptocurrency exchanges that are not officially registered.