SEC warns against investing in crypto-asset securities

The United States Securities and Exchange Commission has often spoken about the alleged “dangers” of crypto-assets, while highlighting the need to heavily regulate the industry. It was not until the FTX outbreak that the regulator increased its aggression.

In yet another case of stigmatizing the asset class, the securities watchdog has issued a bulletin urging investors to exercise caution when handling cryptocurrencies.

SEC’s “Investor Alert”

The SEC’s Office of Investor Education and Advocacy warned investors against considering an investment involving crypto-asset securities citing its “exceptionally volatile and speculative” nature. The post also pointed out that crypto exchanges “may lack important protections for investors.”

The SEC explained that the Act requires parties, including securities 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), such as FINRA. It added that platforms that offer lending or betting services in cryptoassets may be subject to federal securities laws.

It stated that unregistered platforms offering crypto-asset securities may not provide relevant details required by investors to make informed decisions. The SEC also sought to touch on the concept of proof-of-reserves – an audit procedure that allows users to verify that a crypto exchange has sufficient reserves to support all user balances.

Proof-of-reserve reports have gained significant traction following the FTX collapse to address the transparency concerns surrounding centralized crypto exchanges.

But the SEC maintained that these types of services may not provide meaningful insurance and verify that these entities have sufficient assets to cover users’ balances.

“Crypto-asset firms may use these in lieu of audited financial statements to conceal and confuse clients about the safety of their assets. In addition, a proof of reserves is not as rigorous, or as comprehensive, as an audit of financial statements and may not provide any degree of security.”

The SEC further stated that so far no cryptoasset entity is registered with it as a national securities exchange, nor does any existing national securities exchange currently trade cryptoasset securities. In doing so, it indicated that investors who engage in crypto-asset securities cannot benefit from rules that protect against fraud, manipulation, front-running, wash-selling and other abuses.

The actions of the SEC represent a key turning point for crypto, and at the heart of this battle is the debate over whether crypto assets should be considered securities or commodities.

Eyes on Coinbase

The SEC is currently at odds with one of the most prominent crypto exchanges – Coinbase. The San Francisco-based platform was issued a Wells Notice this week, setting the ball rolling on a potential lawsuit, following a series of investigations by the Gary Gensler-led regulatory agency.

In response, Coinbase founder and CEO Brian Armstrong said the SEC reviewed its business in detail and approved the platform to go public two years ago while maintaining it was “right on the law” and “certain on the facts.”