SEC urges caution with crypto investments

The Securities and Exchange Commission (SEC) has issued a notice reminding investors that cryptocurrency offerings may be illegal because they are not registered with the regulator.

The move is in line with the string of regulatory actions brought against a number of crypto platforms since October 2022, when FTX famously imploded. To date, the regulator has gone after Terra, Coinbase, Kraken, Paxos and Binance, alleging that the companies violated investor protection laws or had illegal securities offerings. Just yesterday, the SEC took action against the founder of Tron and celebrities who touted investments in the cryptocurrency.

SEC claims conflict of interest

According to the notice, crypto exchanges may offer a combination of services that are usually offered by separate firms. By offering exchange, brokerage and custody functions, platforms create conflicts of interest that pose a risk to investors.

SEC-registered entities must comply with a number of rules to protect investors. However, according to the regulator, “none of the major crypto-asset entities is registered with the SEC as a broker-dealer, exchange or investment adviser – so investors may not receive the protections provided by the rules applicable to these entities.”

Warning about proof of reserves

The regulator also addressed proof of reserves, which has often been used to show that an entity has enough reserves to cover the amount held in customer accounts. This proof assures customers that their money is safe and available for withdrawal on demand.

“These types of services may not provide any meaningful assurance that these entities have sufficient assets to cover customers’ balances. Furthermore, crypto-asset entities may use these instead of audited financial statements to hide and confuse customers about the safety of their assets, the SEC said.

The notice explains that proof of reserves does not provide the same degree of certainty as an audit of accounts. Evidence of reserves should not be relied upon by investors to conclude that a cryptoasset entity has sufficient reserves to cover customer obligations, according to the SEC’s statement.

Crypto under a microscope

The warning from the SEC is nothing new. It simply puts the legality of crypto investing under a more laser-focused microscope.

According to the SEC’s Office of Investor Education and Advocacy, crypto-asset securities remain a risky investment. They warn that investments in crypto-asset securities, in addition to being exceptionally volatile and speculative, may lack important investor protections on platforms where they can buy, sell, borrow or lend them.

Individual investors who engage in transactions involving crypto-assets, including crypto-asset securities, may face a significant risk of loss and are encouraged to invest only what they can afford to lose completely – something the crypto industry has been preaching for years.