SEC Warns of ‘Potentially Unlawful’ Platforms That Trade in Cryptocurrency

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This article originally appeared at Anti-Media. 


A federal crackdown may be looming over the cryptocurrency world.

On Wednesday, the Securities and Exchange Commission (SEC) published a warning on “potentially unlawful” online platforms used to trade digital assets.

“The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not,” reads the statement. “Many platforms refer to themselves as ‘exchanges,’ which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.”

Continuing, the SEC questions the standards used by platform operators when choosing which assets to trade:

“Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges.”

The regulatory body also suggests the operating framework of some online platforms lacks the “integrity” of exchanges governed by federal rules:

“Many of these platforms give the impression that they perform exchange-like functions by offering order books with updated bid and ask pricing and data about executions on the system, but there is no reason to believe that such information has the same integrity as that provided by national securities exchanges.”

The statement triggered a sharp selloff in cryptocurrency markets, with the top dog, bitcoin, dropping to below $10,000. That puts it roughly 50 percent down from its peak of nearly $20,000 back in December.

This reaction by investors isn’t difficult to understand.

As the cryptocurrency movement has significantly gained steam over the last couple of years, governments and traditional financial regulatory agencies have struggled to come to terms with how to address the “Wild West” nature of digital assets.

A main point of contention among regulators is that most of the initial coin offerings (ICOs) used by startups strongly resemble stock offerings. As such, their reasoning goes, cryptocurrencies should be treated as securities and both the coins and the ICOs should fall under federal regulation.

But the idea of regulation runs contrary to the driving force that made cryptocurrencies so popular in the first place. Naturally, with the SEC issuing such warnings on digital exchanges, investors might be scared away. As Ars Technica explained on Wednesday:

“The cryptocurrency boom has largely been driven by the craze for ICOs — many of which might not pass muster with the SEC. If the SEC starts insisting that exchanges drop tokens that amount to unregistered securities, it could quickly deflate the value of many of those tokens — and also destroy enthusiasm for future ICOs that could run afoul of the same rules.”

Taken in the larger context, the SEC statement reeks of fear. This is perhaps best encapsulated by its closing paragraph:

“We encourage market participants who are employing new technologies to develop trading platforms to consult with legal counsel to aid in their analysis of federal securities law issues and to contact SEC staff, as needed, for assistance in analyzing the application of the federal securities laws.”

The federal government wants — rather, it needs — to have a say in how the trading of digital assets operates. Without an official hand in the game, it risks obsolescence.

Don’t forget, as Anti-Media reported Tuesday, the Marshall Islands just became the first country in the world to adopt a cryptocurrency as legal tender. Venezuela has also  ventured into the fray, with the rollout of its recently created digital currency, the oil-backed “petro,” proceeding as planned.

As with technology in general, the cryptocurrency movement is an ever-evolving organism. No one truly knows what the landscape will look like in the future. At present, however, one thing is becoming increasingly clear: Regulators, whichever way they fall on the issue, are feeling the pressure to act — and act now.

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Read Scott Horton's new book Fool's Errand: Time to End the War in Afghanistan