Regulation Update: How to interpret the Statement on Potentially Unlawful Online Platforms for Trading Digital Assets?

Disclaimer: The following article does not represent IoTeX’s views. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency of the U.S. government.

A Quick Glance of the Crypto Market

The crypto market took a plunge this morning.

Bitcoin: $ 9,766.483 -8.88%
Ethereum: $ 742.21547 -8.82%
Litecoin: $ 180.35349 -8.11%
Timestamp 10:40AM PST via WorldCoinIndex

Negative news that affected the overall crypto market
1. Binance suspected hack
2. MtGox trustee dumping bitcoin for fiat

Things are moving fast in the crypto world. If you have not caught up with what is going on with crypto regulation in your state, read about it here.

We are going to breakdown the public statement released by SEC for you.

Our stance: Neutral.

SEC promised that they will outline which areas of crypto trading they will regulate during the early February Senate hearing and they did.

Let’s jump into it!

Part 1: Introduction

“A number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws. If a platform offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration.”

Translation: If you want to market crypto as a security and want to market yourself as an exchange then you need to register with SEC. This is not that different from what we have been hearing for the past two months.

SEC’s Mission Statement: “Protect investors and prevent against fraudulent and manipulative trading practices.”

Thoughts: We are down with this. Protecting the consumer is an important part of good business practice.

Part 2: Considerations for Investors Using Online Trading Platforms (For Consumers)

This part is meant for the consumers as part of the education program on crypto trading.

Key takeaways:

Make sure the exchange that you have used is not giving you the false impression that they are regulated or meet the standards of the SEC.
Even if they use “strict standards”, most of these exchanges are not reviewed by the SEC.
Don’t assume the trading protocols meet the standards of an SEC-registered national securities exchange.
Even if the exchange tells you that they “offer order books with updated bid and ask pricing and data about executions on the system,” they may not have the same integrity as a SEC approved exchange.

This is kind of like SEC way of saying “Hey consumers, I have already told you that you are putting yourself at risk with these non-regulated crypto exchanges. If you go ahead and still do it, I am gonna assume you understood the risks that you are taking.”

They listed a long list of questions that investors should ask themselves before they jump on the crypto train. If you are serious about minimizing your investment risks, you should evaluate the exchange you are using objectively using the tools that they listed on their website.

SEC cited a few links for consumers to check whether the exchange they are using is a SEC-registered national securities exchanges or alternative trading system (ATS).

Part 3: Considerations for Market Participants Operating Online Trading Platforms (For Exchanges)

Join us or you are out: This is a warning shot for the U.S. based exchanges that you either register with SEC or operate under an exemption from registration.
SRO: If you are going to self-regulate as an industry, then the self-regulatory organization (SRO) must have rules and procedures to govern and discipline the members and persons associated with its members. You may ask what is a SRO? SRO is like a professional organization like ASCE for civil engineers or medical board for doctors. They are like the civilian equivalent of regulators in the business.
ATS is no longer exempt: Those who operated as an ATS is no longer free from regulatory requirements. ATS(s) are required to register with the SEC as broker-dealers and with a SRO as members. A Form ATS needs to be filed. ATS will follow the federal securities laws.
Digital wallet is no longer exempt: Digital wallets, although not strictly an exchange by SEC’s definition, will also be regulated as long as the digital assets are defined as securities and wallet based companies may need to comply with “other registration requirements under the federal securities laws, including broker-dealer, transfer agent, or clearing agency registration, among other things.”

SEC is pretty serious about cracking down crypto scams. They even listed out various enforcement actions that they took with Jon E. Montroll & Bifunder, REcoin Group Foundation, LLC et al, PlexCorps et al, and AriseBank et al as as way to show that they mean business.

Read about our previous post on the Virtual Currencies Senate Hearing here.

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