The U.S. Securities and Exchange Commission could soon crack down on unregulated cryptocurrency trading platforms after the agency sent a strongly worded warning to them this week.
The SEC warned that unregulated online trading platforms may be misleading investors by calling themselves “exchanges,” which implies federal oversight. An SEC-related securities exchange, among other safeguards, has rules designed to prevent fraud and other manipulative practices, the SEC said in an advisory issued Wednesday.
The SEC advisory served as much as a warning to investors using cryptocurrency trading platforms as to the platforms themselves.
“The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not,” the advisory said. “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 SEC does not review the trading protocols used by unregulated trading platforms, it said. “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,” the agency said.
The SEC warning may be a “precursor” new enforcement actions against online trading platforms, said Ryan Gilbert, a partner at Propel Venture Partners, a minority investor in the Coinbase exchange. The SEC advisory recommended new trading platforms come to the agency with questions about legal issues.
The SEC statement may serve as notice to unregulated trading platforms that the agency may be coming after those that do not seek agency guidance, Gilbert said. The SEC may be “playing a wait-and-see game to see who comes forward,” he said.
New trading platforms should “go and engage” with the SEC, he recommended. “That’s always the best thing. When the government issues a statement like that, the first thing a savvy entrepreneur is going to do is call their lawyer.”
The SEC advisory should drive more transparency in cryptocurrency markets, Gilbert said. “The more that government and industry can offer legitimacy, the better for the longevity in this space,” he added.
The cryptocurrency market has some “phenomenal” projects in the works, but investors need to be protected, Gilbert said. “On the back end, everybody should be in a position where they can sleep well at night.”
SEC Chairman Jay Clayton called for new regulations on the trading of cryptocurrencies during February testimony before a Senate committee.
“Those who invest their hard-earned money in opportunities that fall within the scope of the federal securities laws deserve the full protections afforded under those laws,” he said. “This ever-present need comes into focus when enthusiasm for obtaining a profitable piece of a new technology ‘before it’s too late’ is strong and broad. Fraudsters and other bad actors prey on this enthusiasm.”
In the early days of cryptocurrency trading, the SEC largely stayed away from the market. But in recent months, the agency has gotten more active, with five enforcement actions against trading platforms and related businesses since September.
The SEC’s advisory came out the same day that Japan’s Financial Services Agency shut down two cryptocurrency exchanges for a month during its investigation of a $534 million theft from Coincheck in February.
Explore the 2017 Internet Society Global Internet Report: Paths to Our Digital Future to see how governments might play a role in impacting the economy and the Internet itself.