SEC Announces It's Prepared to Enforce Securities Law on Cryptocurrency Platforms

Chris Gaetano
Published Date:
Mar 8, 2018

The Securities and Exchange Commission (SEC) said in a recent statement that services that facilitate the buying and selling of cryptocurrencies are acting as an exchange for a product that is functionally a security, and are therefore within the agency's regulatory purview. 

"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," said the SEC. 

(The Securities Exchange Act of 1934 defines the term "exchange" as "any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.")

The SEC said that it has had concerns about the proliferation of online trading platforms that refer to themselves as "exchanges," which it said can give investors the mistaken impression that they are regulated or meet the regulatory standards of a national securities exchange. The SEC further noted that, although certain platforms may not strictly meet the definition of an exchange, they still directly or indirectly offer trading or other services related to digital assets that it considers to be a security, such as digital wallet services. This interaction, according to the SEC, may trigger other registration requirements under federal securities laws, such as broker-dealer, transfer agent, or clearing agency registration. Further, if a platform offers digital assets, those assets need to be registered or specifically exempted from registration; failing this, a platform may be participating in an unregistered offer and sale of securities. 

The agency has had an increased interest in cryptocurrencies, as demonstrated by recent enforcement actions. Within just a few months, the SEC has halted two initial coin offerings that it said were really just scams, suspended trading on three issuers regarding questions about its recent cryptocurrency acquisitions and, most recently, charged a Bitcoin-denominated exchange operator with fraud. Jay Clayton, the new SEC chair, noted that he is concerned that people's enthusiasm for cryptocurrency and block chain is confusing investors and leading to strange market effects like a beverage company boosting its stock 500 percent just by putting "block chain" in its name. 

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