The Securities and Exchange Commission (SEC) has issued a warning reminding investors that cryptocurrency offerings may be illegal because they are not registered with the regulator.
The central theses
- The SEC has issued an investor alert regarding crypto asset securities.
- The warning follows a series of regulatory measures against crypto platforms.
- The regulator warns about possible conflicts of interest and cautions against proving reserves.
The move is in line with a series of regulatory actions taken against numerous crypto platforms since October 2022, when FTX famously imploded. So far, the regulator has prosecuted Terra, Coinbase, Kraken, Paxos and Binance, alleging the companies violated investor protection laws or conducted illegal securities offerings. Just yesterday, the SEC took action against Tron’s founder and celebrities who touted investments in the cryptocurrency.
SEC alleges conflict of interest
According to the warning, crypto exchanges may offer a combination of services that are typically offered by separate companies. By offering exchange, broker-dealer and custody functions, platforms create conflicts of interest that pose risk to investors.
Companies registered with the SEC must comply with a number of rules to protect investors. However, according to the regulator, “none of the major crypto asset firms are registered with the SEC as broker-dealers, exchanges, or investment advisers – investors therefore may not receive the protections afforded by the rules applicable to these firms.”
Proof of reserves warning
The regulator also looked at proof of reserves, which is commonly used to prove that a company has enough reserves to cover the amount held in customer accounts. This proof ensures customers that their funds are safe and can be withdrawn when needed.
“These types of services may not provide a meaningful guarantee that these companies have sufficient assets to cover their customers’ balances. “In addition, crypto-asset companies could use them instead of audited financial reports to obscure and confuse customers about the security of their assets,” the SEC said.
The warning explains that proof of reserves does not provide the same level of assurance as an audit. According to the SEC statement, investors should not rely on evidence of reserves to conclude that a crypto asset company has sufficient reserves to cover customer liabilities.
Crypto under the microscope
The SEC’s warning is nothing new. It simply puts the legality of crypto investments under the microscope.
According to the SEC’s Office of Investor Education and Advocacy, crypto asset securities are still a risky investment. They warn that investing in crypto asset securities is not only exceptionally volatile and speculative, but may lack important investor protections on platforms where they can buy, sell, borrow or lend them.
Individual investors who engage in transactions involving crypto assets, including crypto asset securities, may be exposed to significant risk of loss and are encouraged to invest only what they can afford to lose in full – something that the Crypto industry has been preaching for years.
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