SEC warns investors about cryptocurrency exchanges

The Securities and Exchange Commission (SEC) has filed a fresh warning to investors about unregulated cryptocurrency exchanges.

The SEC, Divisions of Enforcement and Trading and Markets, has published a statement on “online trading platforms,” or cryptocurrency exchanges, that trade in tokens minted by initial coin offerings (ICOs) and digital assets in general.

Online trading platforms have become a popular way for investors to buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings (“ICOs”).

These platforms often claim to give investors the ability to quickly buy and sell digital assets, bringing buyers and sellers together in one place and offering investors access to automated systems that display priced orders, execute trades, and provide transaction data.

The SEC stated: “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.”

Despite many online trading platforms appearing to investors as SEC-registered and regulated marketplaces, the SEC stressed that they are not. Simply referencing the term exchange can provide a ‘misrepresentation to investors’ that a platform meets regulatory approval.

“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.”

While 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, the SEC said there is still no reason to believe that such information has the same integrity as that provided by national securities exchanges.

The statement said that a platform that trades securities and operates as an “exchange,” must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for ATSs under SEC Regulation ATS.  A national securities exchange must itself comply with the federal securities laws and must file its rules with the Commission.

To operate as an ATS must register as a Broker Dealer, the entity has to become a member of an SRO (IE FINRA) and submit itself to ATS regulatory requirements.

The SEC added, “Many online crypto exchanges do not currently meet this definition under federal securities laws and may be deemed as trading digital assets that are securities.”

Earlier this year, The Securities and Exchange Commission filed charges against a former cryptocurrency exchange and its founder. It alleged BitFunder and founder Jon E. Montroll operated an unregistered securities exchange and defrauded its users by misappropriating their bitcoins. It also charged the operator with making false and misleading statements in connection with an unregistered offering of securities.

Copyright © 2018 RegTech Analyst

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