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SEC Issues Warning Against Investing in Crypto Asset Securities

SEC Issues Warning Against Investing in Crypto Asset Securities

The United States Securities and Exchange Commission has expressed concerns about the risks associated with crypto-assets and stressed the importance of tighter regulations for the industry. However, it was not until the FTX incident that the regulator intensified its efforts.

The securities watchdog has once again brought negative attention to the asset class by releasing a bulletin urging caution among investors when dealing with cryptocurrencies.

SEC’s “Investor Alert”

The Office of Investor Education and Advocacy at the SEC has warned investors about the exceptionally volatile and speculative nature of crypto asset securities while also highlighting that crypto exchanges may lack critical investor protections.

The SEC emphasized that the law requires securities broker-dealers, investment advisers, alternative trading systems (ATS), and exchanges to register with the regulatory agency, a state regulator, and/or a self-regulatory organization (SRO) like FINRA. Digital asset platforms providing lending or staking services may also be subject to federal securities laws.

The commission stated that platforms not registered and offering crypto asset securities may not provide sufficient information for investors to make informed decisions. It also addressed the concept of proof-of-reserves, a process that allows users to verify if a crypto exchange has adequate reserves covering all user balances.

Proof-of-reserve reports gained prominence after the FTX collapse as they address concerns around transparency in centralized crypto exchanges. However, the SEC claims that these services may not provide any meaningful assurance or verify whether the entities have sufficient assets to back their customers’ balances.

“Crypto asset entities may use these reports to avoid audited financial statements to confuse customers about the safety of their assets. Additionally, proof of reserves is less stringent and comprehensive than a financial statement audit and may provide no level of assurance.”

The SEC also confirmed that no crypto asset entity is registered with it as a national securities exchange, and no existing national securities exchange currently trades crypto asset securities, stating that investors dealing with crypto asset securities may not be protected against fraud, manipulation, front-running, wash sales, and other abuses.

These actions represent a significant turning point for the crypto industry, with the main debate being whether crypto-assets should be considered commodities or securities.

Eyes on Coinbase

The SEC is currently in a legal battle with Coinbase, one of the most well-known crypto exchanges. The San Francisco-based platform received a Wells Notice this week, indicating that a potential lawsuit could be on the way, following various investigations by the Gary Gensler-led regulatory agency.

In response, Coinbase’s co-founder and CEO, Brian Armstrong, stated that the SEC previously reviewed and approved the company’s business in detail for going public two years ago, believing they were “right on the law” and “confident in the facts.”