As noted in my December 2017 and January 2018 posts, the SEC’s Divisions of Enforcement and Trading and Markets have pointed out in a public statement issued today that online trading platforms for cryptocurrencies that operate as “exchanges” (as that term is defined in the securities laws) and where the traded cryptocurrencies meet the SEC’s definition of “securities”, must register themselves with the SEC as a national securities exchange or be exempt from such registration.
The Divisions also repeated their concern that investors viewing such online platforms may believe them to be SEC-registered and regulated when in fact they are not and pointed out again that the federal regulatory framework governing national securities exchanges and exempt markets is designed to protect investors and to prevent fraudulent and manipulative trading practices in the marketplace.
In addition to warnings to investors, the Divisions offered some considerations for operators of online trading platforms to keep in mind, namely that
- a platform that trades “securities” and operates as an “exchange” (as those terms are defined in the securities laws), must be registered as a national securities exchange or operate under an available exemption from such registration;
- an SEC-registered national securities exchange must, among other things, have rules designed to prevent fraudulent and manipulative acts and practices;
- as a self-regulatory organization (an SRO), such an exchange must have in place rules and procedures governing member discipline and must enforce the compliance of those members with the securities laws;
- such an exchange must itself comply with the federal securities laws and must file its rules with the Commission as required by those laws;
- if an entity is seeking to operate as an alternative trading system (ATS), then it must register with the SEC as a broker-dealer, and as such, must have in place policies and procedures to prevent the misuse of material non-public information, books and records requirements, financial responsibility rules, and rules covering the safeguarding and custody of customer funds and securities; and
- if the platform doesn’t meet the definition of “exchange” under the federal securities laws, but offers other services related to digital assets that are securities, such as wallet services, these services may also trigger registration requirements under the securities laws, including broker-dealer, transfer agent, or clearing agency registration, among others, and may be participating in the unregistered offer and sale of securities if those securities are not registered or exempt from registration.
The creators and managers of cryptocurrency trading platforms are strongly urged to consult with counsel before engaging in the provision of such vehicles and services to ensure that they do so in compliance with the federal securities laws. Failure to do so can have materially adverse civil and criminal consequences to the platform and its operators. The SEC has repeatedly emphasized that it will enforce the securities laws as they apply in the cryptocurrency marketplace, and I expect a burst of enforcement activity in that regard in coming months.
If you would like to discuss your firm’s participation in the cryptocurrency market as a platform sponsor or creator, please contact me at the address below to discuss the implications of the US securities laws for that contemplated activity.
This publication should not be considered as legal opinions on specific facts or as a substitute for legal counsel. It is provided by the Law Office of John P. Ziaukas, for general information purposes and may be considered attorney advertising in some jurisdictions. All rights reserved. © 2018 John P. Ziaukas.