“The SEC is concerned that numerous online trading platforms are seen by investors as SEC-registered and regulated marketplaces, when in fact they are not.”

On March 7, 2018, the U.S. Securities and Exchange Commission (SEC) said in a statement that many online trading platforms for cryptocurrencies should be registered with the regulator and subject to additional rules.1 Online trading platforms have become a way for investors to trade digital assets, including coins and tokens bought and sold in so-called Initial Coin Offerings (ICOs).2 These platforms allow sellers and buyers to come together in one place, and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data. Some of these platforms offer a mechanism for the trading of assets that meet the definition of a security under federal securities laws.3 If this is the case, and the platform operates as an “exchange,” then it must register with the SEC, or be exempt from registration, as defined by federal securities laws. The federal regulatory framework is structured to protect investors and prevent against fraudulent and manipulative trading practices.4

What this means

The SEC is concerned that numerous online trading platforms are seen by investors as SEC-registered and regulated marketplaces, when in fact they are not. Many of these platforms identify themselves as “exchanges,” creating the impression that they are regulated, or meet the regulatory standards of a national securities exchange, which the SEC says gives investors an unearned sense of safety.5 Although some of the digital trading platforms claim to use strict standards, these should not be equated to the listing standards of national securities exchanges, neither should the trading protocols determining how orders are executed as none of these features are either reviewed or regulated by the SEC.6 Jay Clayton, Chairman of the SEC, has often expressed his concern about ICOs and cryptocurrencies, and encouraged investors to use caution, and closely study any platform before trading with it.7

In addition to the SEC, the Commodity Futures Trading Commission (CFTC) is also focused on cryptocurrency regulation. At a House committee hearing on the CFTC’s 2019 budget, CFTC Chair, Christopher Giancarlo said that he has been in talks with the International Organization of Securities Commissions (IOSCO) and other European regulators on cryptocurrencies.8 While there is no scheduled timing, a Treasury Department working group, which includes the SEC, the CFTC and bank regulators, are looking at coming up with a coordinated plan to address who should regulate what, and how, in the cryptocurrency markets.9 At present the CFTC regulates cryptocurrency futures, but not the actual trading of Bitcoin, and the SEC’s jurisdiction covers cryptocurrency products that are deemed to be securities.10

The Bank for International Settlements (BIS) has also issued a report warning central banks about the potential risks in issuing their own cryptocurrency.11 Jaqueline Loh, the BIS markets committee chair, and deputy managing director of the Monetary Authority of Singapore said, “There are risks we do not fully understand at this point,” and “Any step towards a possible launch of a CBDC (Central Bank Digital Currency) should be subject to careful and thorough consideration.”12 However, the BIS report did say that Blockchain, or the distributed ledger technology (DLT) which underpins crypotocurrencies could make the settling of more traditional securities and currencies more efficient.13

Conclusion

The BIS report will inform discussion at the Group of 20 Economies (G20) meeting, among central bankers and finance ministers, in Argentina in late March 2018, and regulation for cryptocurrencies will be a priority.14 The Financial Stability Board, the G20’s regulatory watchdog will report on the private cryptocurrencies such as Bitcoin. Benoit Coeure, chair of the BIS committee on payments and market infrastructure, said, “It’s clearly a learning curve and regulators across the world have addressed what are the immediate risks created by private digital tokens.”15 The priority during discussions will be investor protection, as well as anti-money laundering and terrorist financing, with regulation coming later.16 “..any discussion in the G20 … will be likely to be forward looking, discussing the pros and cons of regulation, but don’t expect concrete action, it’s more about comparing experiences so far,”17 said Coeure. Both Christopher Giancarlo and Jay Clayton agree that U.S. bank regulators and global financial regulators are working well together to combat cryptocurrency fraud, and they may ask Congress for more power and clarification on cryptocurrency regulation.18

References

  1. “U.S. regulator urges registration of cryptocurrency exchanges,” Reuters, March 7, 2018. Access at: https://www.reuters.com/article/us-usa-sec-crypto/u-s-regulator-urges-registration-of-cryptocurrency-exchanges-idUSKCN1GJ2PB
  2. “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets,” U.S. Securities and Exchange Commission, March 7, 2018. Access at: https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading
  3. Ibid
  4. Ibid
  5. Ibid
  6. Ibid
  7. S. regulator urges registration of cryptocurrency exchanges,” Reuters, March 7, 2018. Access at: https://www.reuters.com/article/us-usa-sec-crypto/u-s-regulator-urges-registration-of-cryptocurrency-exchanges-idUSKCN1GJ2PB
  8. “U.S., Foreign Regulators Working Well Together To Combat Cryptocurrency Fraud, Says CFTC Chair,” Forbes, March 7, 2018. Access at: https://www.forbes.com/sites/tedknutson/2018/03/07/u-s-foreign-regulators-working-well-together-to-combat-cryptocurrency-fraud-says-cftc-chair/#4d31d850424e
  9. Ibid
  10. Ibid
  11. “Central banks told to think twice before boarding Bitcoin bandwagon,” Reuters, March 12, 2018. Access at: https://www.reuters.com/article/us-crypto-currencies-bis/central-banks-told-to-think-twice-before-boarding-bitcoin-bandwagon-idUSKCN1GO2JX
  12. Ibid
  13. Ibid
  14. Ibid
  15. Ibid
  16. Ibid
  17. Ibid
  18. “U.S., Foreign Regulators Working Well Together To Combat Cryptocurrency Fraud, Says CFTC Chair,” Forbes, March 7, 2018. Access at: https://www.forbes.com/sites/tedknutson/2018/03/07/u-s-foreign-regulators-working-well-together-to-combat-cryptocurrency-fraud-says-cftc-chair/#4d31d850424e

Newsletter Author: Venetia Woo, Mairi Bryan
Newsletter Contact Person:
Venetia Woo

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.

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