Does that bring all the cryptocurrency exchanges under the SEC umbrella?
The SEC report dated 7th March, 2018 speaks of the present state of crypto exchanges and potential risks that investors may face. The report states further that some digital assets, ICOs and cryptocurrencies could fall under the classification of ‘securities’ and therefore every trading platform which exchanges them should register with the regulator and comply with regulations laid down for the purpose. The report states further that platforms operating as an ‘exchange’ falling within the definition under the federal securities law and offer trading in digital assets considered securities, must register with the SEC as an exchange for national securities, or they should be exempt from the registration. The SEC stated further that it is concerned about different parties potentially conducting fraudulent or illicit trading through exchanges that are not registered and trade in such ‘securities’ (digital assets). Even cryptocurrency exchanges allowing trading in only high quality cryptocurrencies, the SEC or other regulatory bodies exercise no control over which coins are high quality or qualify for trading.
Traders should be cautious with cryptocurrency exchanges
The SEC report further warns that nearly all cryptocurrency exchanges may not comply will all regulatory requirements and may fail to provide appropriate protection or support if customers lose funds or the exchanges are attacked by hackers. Trading engines employed by cryptocurrency exchanges also may not guarantee providing accurate trading data when they are not within the ambit of the SEC.
The SEC reports add further that most of the platforms convey the impression of performing functions like an exchange by providing order books having updated ask and bid price and data on how they are executed on the system. However, the reason to assume that such information comes with the same level of integrity provided by securities exchanges regulated by the SEC is lean. The SEC has further advised traders and investors to check properly if the cryptocurrency exchanges they are dealing with are regulated, registered, reliable and open to users without restrictions.
Increasing regulatory action on cryptocurrency exchanges
Last week has also seen more action from financial watchdogs from other parts of the world on cryptocurrency exchanges in an effort to restrain the freewheeling in crypto markets which has drawn retail investors in significant numbers. FSHO and Bitstation were ordered closed by the Japanese authorities for one month and five others have been asked to bring about improvements in internal controls.
The language in the SEC report is seen as tough and the already volatile cryptocurrency markets are experiencing ripples. The SEC’s stand that digital tokens stand on par with securities is at odds with the views among some of the issuers of ICOs. This segment holds the view that tokens while having utility do not represent an investment and therefore should fall outside the regulatory framework. But, considering that often times, these tokens can be traded well ahead of the service of platform being available and many people may make an investment expecting their values to rise negates the view that they are not investment.
The SEC has further reminded that if online trading platforms identify themselves as exchanges, they could fall under the regulator’s scrutiny. The report adds that activities requiring registration cannot be conducted until the business has been registered. According to legal experts, most cryptocurrency exchanges will face a problem from the recent stand taken by the SEC and seeking registration as an alternative system of broker/dealer/trading to become compliant is a process that could consume several months.
Gemini and GDAX (Coinbase exchange) are among US based cryptocurrency exchanges are among those who could be impacted by the SEC report. A spokesperson for GDAX however stated that the company while supporting efforts for regulating cryptocurrencies , under the present SEC guidance, GDAX’s businesses do not come under the registration requirement since it does not list assets that could be construed as securities similar to ICO tokens. GDAX lists only 4 cryptocurrencies which includes bitcoin and ethereum. The spokesperson added that most of the ICO tokens trade on overseas exchanges and if those exchanges sell to traders based in US, the SEC can approach the overseas regulators for appropriate action. The regulatory focus has stemmed from several knocks that the cryptocurrency markets have experienced in recent times. Binance which is among the biggest crypto exchanges in the world recently suffered a large scale hacking attempt to usurp user coins and manipulate prices in the market. However, Binance was successful in thwarting the hacking attempt though it did leave a dent on the confidence traders had on the exchange.
Other nations moving in similar direction
In India too, the taxmen are moving in to take a closer look at cryptocurrency exchanges and are gathering adequate data before launching any potentially punitive action.