SEC Starting to Regulate Cryptocurrency Exchanges, Warns Investors

The SEC has been zeroing in on cryptocurrency since the beginning of the year. The agency announced it would scrutinize companies generating hype by pivoting to crypto before delving deeper into initial coin offerings with subpeonas. But today the agency turned its attention to people buying cryptocurrencies, warning consumers against trusting so-called 'exchanges' that state or imply that they're protected by federal law. Spoiler: They aren't, because the cryptocurrency world remains an unregulated mess.

It comes down to semantic wording. Whether or not these online trading platforms consider the 'digital asset' cryptocoins they're trafficking to be 'securities' under federal law, the SEC likely does. That means they satisfy the agency's definition of 'national security exchanges' and should register with the SEC. If they don't, they remain outside of government scrutiny and regulation, meaning the agency can't protect individuals from any manipulative or fraudulent practices.

"Many platforms refer to themselves as "exchanges," which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange. Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges," the SEC stated in a post.

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Does Bank of America View Cryptocurrencies as a Threat to its Business?

One of the world’s largest financial institutions admitted in its annual report that cryptocurrency is a looming threat to its business model.

According to a report filed with the SEC by Bank of America:

Clients may choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky, such as cryptocurrencies. Increased competition may negatively affect our earnings by creating pressure to lower prices or credit standards on our products and services requiring additional investment to improve the quality and delivery of our technology and/or reducing our market share, or affecting the willingness of clients to do business with us.

Still on the fringes of the mainstream, cryptocurrencies have gained notoriety in recent months — particularly after a strong December that saw Bitcoin reach new heights of almost $20,000 per coin, and the addition of futures contracts on two major exchanges.

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Congress is Eying Regulations for the Cryptocurrencies

Jolted by the global investment craze over bitcoin and other cryptocurrencies, U.S. lawmakers are moving to consider new rules that could impose stricter federal oversight on the emerging asset class, several top lawmakers told Reuters.

Bipartisan momentum is growing in the Senate and House of Representatives for action to address the risks posed by virtual currencies to investors and the financial system, they said.

Even free-market Republican conservatives, normally wary of government red tape, said regulation could be needed if cryptocurrencies threaten the U.S. economy.

“There’s no question about the fact that there is a need for a regulatory framework,” said Republican Senator Mike Rounds, a Senate Banking Committee member.

Digital assets currently fall into a jurisdictional gray area between the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Treasury Department, the Federal Reserve and individual states.

Much of the concern on Capitol Hill is focused on speculative trading and investing in cryptocurrencies, leading some lawmakers to push for digital assets to be regulated as securities and subject to the SEC’s investor protection rules.

“The SEC is properly the lead on the issue,” said Republican Representative Bill Huizenga, chairman of the House Financial Services Subcommittee on Capital Markets which will hold hearings on the issue in coming weeks.

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US Regulators Believe Cryptocurrencies Need Special Oversight

Digital currencies such as bitcoin demand increased oversight and may require a new federal regulatory framework, the top U.S. markets regulators will tell lawmakers at a congressional hearing on Tuesday.

Christopher Giancarlo, chairman of the Commodity Futures Trading Commission (CFTC), and Jay Clayton, chairman of the Securities and Exchange Commission (SEC), will provide testimony to the Senate Banking Committee amid growing global concerns over the risks virtual currencies pose to investors and the financial system.

Giancarlo and Clayton will say a patchwork of rules for cryptocurrency exchanges may need to be reviewed in favor of a rationalized federal framework, according to prepared testimony published on Monday.

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