“Significant” risk of loss if you invest in crypto, SEC warns publicly
Listen to the CoinMarketRecap podcast on Apple Podcasts, Spotify and Google Podcasts
A day after announcing that it is likely to sue Coinbase for selling unregistered securities, the Securities and Exchange Commission issued a strong warning to investors to stay away from crypto.
Wednesday’s issuance of a Wells Notice warning of a possible lawsuit to the top U.S. exchange is considered the opening salvo of the agency’s latest and most direct attempt to prove that all cryptocurrencies, except Bitcoin, should be registered as securities.
Investor Alert on March 23 warned that “investing in crypto-asset securities can be exceptionally volatile and speculative, and the platforms through which investors buy, sell, borrow or lend these securities may lack important investor protections.” It added:
The key phrase there is “crypto asset securities.”
In some ways, the investor alert previews what the SEC sees as the reasons it and its chairman, Gary Gensler, believe all cryptocurrency issuers and exchanges should register with it — the goals it will pursue in a likely lawsuit against Coinbase.
“The silver lining, to the extent that it is one of these types of developments, is that it will force the establishment of case law that will inform how crypto is regulated, and it will set some rules of the road for crypto to adhere to.” Brett Quick, head of government affairs at the Crypto Council for Innovation, told CoinDesk TV on Thursday.
As Coinbase has made very clear, it will fight any such lawsuit in court – as Ripple currently is – the result will inevitably be a legal precedent on whether cryptocurrencies are securities.
The SEC notice begins with a lengthy section warning that “those offering investments or services in cryptoassets are not complying with applicable laws, including federal securities laws.”
Delving into the many types of information important to investors that must be disclosed by issuers of securities, particularly independently audited financial statements, the SEC then turned to exchanges that failed to register.
“Some of these benefits include rules around custody of assets, fees, conflicts of interest, standards of conduct and minimum capital requirements for broker-dealers,” it said.
One of these, the Client Protection Rule, “requires broker-dealers to protect client assets and keep client funds separate from the firm’s assets—increasing the likelihood that clients’ securities and cash can be returned to them in the event of broker-dealer failure.”
That is, it prevents the mixing of assets that has been a large part of the most recent bankruptcy cases.
The SEC also took aim at the proof of reserve reports that many crypto exchanges have rushed to offer in the wake of the collapse of FTX. It said:
Then there’s the intermingling of functions — such as exchange, broker-dealer and custodian — that “create conflicts of interest and risk for investors.”
The SEC said that “no cryptoasset entity is registered with the SEC as a national securities exchange,” the SEC said:
The SEC then went deeper into the warnings about the high risk of volatile crypto-assets and the prevalence of fraud and scams, ending with standard investment advice to have an investment plan, hold a diverse portfolio of assets and understand the risks.
