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SEC Enforcement Branch to Take Hard Look at Crypto-Currencies

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The high-flying crypto-currency market in the U.S. will get its wings clipped if federal regulators have anything to say about it. 

In a March 7 statement, Securities and Exchange Commission Chairman Jay Clayton announced that the agency’s enforcement branch would begin looking at crypto-currency exchanges as well as at Initial Coin Offerings of crypto-currencies. The statement singled out trading platforms that treat those currencies as digital assets which are then traded in a manner similar to securities. 

“If a platform offers trading of digital assets that are securities and operates as an ‘exchange,’ as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration,” the statement said. Clayton said in his statement that just because they are called currencies or coins does not mean they are not securities. 

Clayton also noted that a number of crypto-currency exchanges represent themselves as being SEC registered when they are not. He said that so far, the SEC none of those platforms has registered as security exchanges. 

In an earlier statement, Clayton outlined the risks to purchasers in doing business with crypto-currency exchanges, pointing out that unregistered securities have substantial risk of loss and that because an investor’s money may travel outside of their national border, there’s nothing the SEC or another regulator can do to protect them. 

The SEC statements don’t ban trading in crypto-currencies and they aren’t aimed at the purchase of individual currencies. However they are providing a warning to platforms that package and sell crypto-currencies in a manner similar to securities. The warning also applies to the packaging of initial coin offerings in which crypto-currencies are used as a way to raise investment funds. 

The SEC is not new to the crypto-currency trading issue. In February the SEC charged BitFunder and its founder Jon Montroll with operating an unregistered exchange and with fraud for misappropriating customers’ Bitcoins. The U.S. Attorney’s office for the Southern District of New York has filed criminal charges in the same case. 

When did SEC take the actions described below

The scrutiny regarding ICOs may have been spurred by its actions when it froze the assets of ReCoin and its managers for a scheme in which they claimed that their offering was backed by real estate in one case and by diamonds in another. In a similar action, the SEC froze the assets of PlexCorps which was selling a security called PlexCoin for selling unregistered securities and for fraud. 

In fact, the SEC has been going after crypto-currency fraud for several years. In 2014, the SEC obtained an administrative settlement against BTC Trading Corp for a scheme that involved selling securities for Bitcoins. 

What’s different now is that the SEC is putting the industry on notice that it considers crypto-currency exchanges and the platforms on which they run to be securities exchanges as defined by current laws, which requires them to be registered with the SEC. It is also asserting that it considers ICOs to be securities, which are also regulated. 

The agency is also scrutinizing crypto-currency activities that are using ICOs to raise funding. In December 2017 a California company that was selling digital tokens to investors as a way to raise capital for a blockchain-based food review service halted its offering when the SEC raised questions about securities registration. Part of the problem was that the company, Munchee, Inc., was saying it would create a digital market for its tokens, and expected them to rise in value. 

Munchee’s operators were attempting to fund development of a smartphone app that people could use when looking for restaurants. Apparently the company found another way to raise money, since the Munchee app does in fact exist in the Apple App Store. 

It would appear that the SEC is going to be pretty busy when it comes to keeping tabs on the various ways in which people can try to make money with crypto-currency. For example, a Florida real estate agency is now offering a list of properties that you can buy using crypto-currency. In its press release, Re/Max Action First in Tampa emphasizes the speed and anonymity of such transactions. 

“The clear advantage of using crypto-currency throughout the exchange is that it can increase in value and reap great rewards for the seller,” the head of the agency, Kenny Hayslett is quoted as saying in his release. 

While the SEC hasn’t commented on this particular opportunity, it could be the sort of thing that seems to be appearing more and more often. This isn’t the first time I’ve seen offers to use crypto-currencies as an investment instrument and it’s not the first time that the potential for substantial rewards are emphasized. 

The announcement by the SEC resulted in a drop in the value of a Bitcoin to under $10,000. The explanation in the financial media is that Bitcoin holders are fearful of government regulation. 

But it would seem that for most investors the lack of regulation, along with the extreme volatility of crypto-currency values is reason enough to stay out of the market. Tie that to the use of crypto-currencies in criminal activity, their exposure to theft through hacking and the fact that many of the platforms involved don’t seem to take even minimal care of their investors money, and there’s a lot of reason to be cautious. 

When the SEC completes its review of crypto-currency trading operations you can expect it to crack down in a big way, which means it won’t be a good time to be the operator or a crypto-currency exchange or entrepreneur. 





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