SEC Publishes Warning Against Unlawful Crypto Exchanges

SEC Publishes Warning Against Unlawful Crypto Exchanges

On Wednesday, March 7, the U.S. regulator the Securities and Exchange Commission (SEC) published a letter concerning the potential of unlawful online platforms that trade digital assets. The SEC is concerned with platforms operating without permission and advises investors to use entities that are registered with the SEC as an alternative trading system (ATS).

Investors Should Use a Platform or Entity Registered with the SEC

The top U.S. regulatory agency has issued a warning to “unlawful online platforms that trade digital assets” alongside issuing a recommendation to digital currency investors. The SEC says that many exchanges have become popular selling cryptocurrencies and Initial Coin Offerings (ICOs). A number of the platforms offer a mechanism to trade assets that the SEC considers a “security” and some of them are operating unlawfully. If this is the case 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,” explains the SEC letter.

To get the protections offered by the federal securities laws and SEC oversight when trading digital assets that are securities, investors should use a platform or entity registered with the SEC, such as a national securities exchange, alternative trading system (“ATS”), or broker-dealer.

While the SEC’s Letter Questions if Exchanges Are Lawful, Crypto Prices Plummet

Immediately after the SEC letter was published and started being shared across social media and forums, cryptocurrency markets dropped significantly in value. The top 100 digital currencies according to Coinmarketcap.com saw losses between 10-20 percent in a short period of time.

The SEC explains that many platforms give the impression they are a registered exchange that offers functionality like bidding, order books, and execution data. However, these attributes do not make a platform qualified in the eyes of the U.S. regulators and federal securities laws. So the SEC has created a list of 13 questions investors should ask themselves before using an online trading platform. These include asking if the platform has registered as a national securities exchange, seeing if the exchange is an ATS, and other questions that determine whether or not the exchange is lawful.