Last week the Securities and Exchange Commision (SEC) issued a new report warning about the dangers of unregulated crypto exchanges and stated that all trading platforms exchanging digital assets that are considered securities must register with the SEC.
This effectively means that all the crypto exchanges are illegal unless they register with the SEC. This is important because the majority of the $400B cryptocurrency ecosystem is based on trading altcoins or utility tokens.
On March 7, 2018, the U.S. Securities and Exchange Commision (SEC) published a new report regarding the current state of cryptocurrency exchanges and the potential risks for investors. The report states that some ICOs, digital assets, and cryptocurrencies could be classified as “securities” and thus each trading platforms that exchange them must register with the SEC and comply with necessary regulations. The report states:
“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 report continued:
“The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not. Many platforms refer to themselves as “exchanges,” which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.”
The report also warns that most cryptocurrency exchanges may not fully comply with all regulatory measures and may not offer proper support or protection in the event that the exchange gets hacked or users lose funds. The trading engines of cryptocurrency exchanges may also not guarantee to provide accurately trading data if they are not registered and reviewed by the SEC.
Spencer Bogart, partner at Blockchain Capital said:
“The SEC continues to draw a line in the sand between securities and non-securities but without going so far as to name names,”
Lastly, many of these platforms give the impression that they perform exchange-like functions by offering order books with updated bid and ask pricing and data about executions on the system, but there is no reason to believe that such information has the same integrity as that provided by national securities exchanges.
The SEC also advises investors and traders to properly check if a cryptocurrency exchange is registered, regulated, reliable and open to all users.
Current views on whether an asset is a security tend to follow the “Howey Test,” which comes from a 1946 U.S. Supreme Court case. The ruling says a security involves the investment of money in a common enterprise, in which the investor expects profits primarily from others’ efforts.
It should be noted that the SEC is not trying to ban, or stifle growth in Cryptocurrencies through these efforts as some commentators have observed, but are simply to trying to extend the same protection to investors offered with other investments assets.
You can read more about the SEC view on ICOs here – sec.gov/ICO