SEC Suggests Investors to ‘Exercise Caution’ Crypto Asset Securities
The U.S. Securities and Exchange Commission has issued an advisory letter to investors warning them to be wary of risks connected with crypto asset securities in light of recent enforcement action against different crypto businesses and celebrities. The American securities regulator is certain that certain businesses providing investments in or services related to crypto assets “may not be complying with applicable law, including federal securities laws.”
- Securities Watchdog Alerts of Risks Associated With Crypto Asset Securities Amid Recent Enforcement Action
In an “Investor Alert” released on March 23, 2023, the U.S. Securities and Exchange Commission (SEC) advises investors to “exercise caution” while dealing with “crypto asset securities.” The SEC basically states that anybody thinking about investing in a cryptocurrency asset
The SEC also examines and minimizes the use of the proof-of-reserves (POR) approach of transparency by cryptocurrency companies like exchanges. POR techniques “may only provide a snapshot,” the regulator says, and proof-of-reserves “may not show liabilities” or the “use of customer crypto assets in crypto asset lending.” The SEC also made clear that while POR pictures are permissible, they “do not offer protection against the entity moving customer assets.”
The SEC explains that a proof-of-reserves “may not provide any level of assurance” and is “not as rigorous, or as comprehensive, as a financial statement audit.”
The SEC’s advisory warning comes after the agency recently filed a lawsuit against Do Kwon, the CEO of Terraform Labs, Justin Sun, the founder of Tron, and Coinbase. Along with many other famous people, the regulator has lately brought charges against socialite Kim Kardashian, NBA Hall of Famer Paul Pierce, actress Lindsay Lohan, and YouTuber Jake Paul.
- ‘So-Called Crypto Exchanges’ Combine Operations That Many SEC Registered Organizations Handle
According to the investor alert, “so-called crypto exchanges” are not SEC-registered entities and provide a variety of services that are “typically performed by separate firms that may each be required to be separately registered with the SEC, a state regulator, or a [self-regulatory organization],” according to the investor alert. Incorporating such activities “creates conflicts of interest and risks for investors,” the regulator observes.
The SEC also notes that the cryptocurrency industry has had large business insolvencies over the past 12 months and that the market has been “exceptionally volatile.” The agency said, “Fraudsters continue to take advantage of the growing popularity of crypto assets to entice retail investors into scams, frequently resulting in devastating losses.” The advisory warning from the regulator also comes after Gary Gensler, the chairman of the SEC, expressed his views in an interview with New York Magazine’s Intelligencer.
Gensler provided justifications for his classification of all crypto assets other than bitcoin (BTC) as securities throughout the interview. In a lawsuit against the cryptocurrency exchange Kucoin, Letitia James, the attorney general of New York, has deemed Ethereum (ETH) to be a security.
- Rostin Behnam, the head of the Commodity Futures Trading Commission, has claimed that bitcoin is a commodity, though. Behnam made comments on Gensler’s Intelligencer interview, and Ripple’s chief legal officer recently stated that Gensler may “recuse himself from voting on any enforcement case” as a result of his Intelligencer commentary.