SEC Issues Statement on Crypto Exchanges (Here is What it Actually Says)

The SEC issued a statement on cryptocurrency exchanges. This, combined with other news gave the market the jitters. Let’s look at what the SEC officially has to say…. rather than speculating and panicking (like the market did a bit today over the SEC news, a story about MtGox, and a story about Binance).^[1]

What the SEC has to say is best summed up in this excerpt from “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets“:

Online trading platforms have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings (“ICOs”).  The platforms often claim to give investors the ability to quickly buy and sell digital assets.  Many of these platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data. A number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws.  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 federal regulatory framework governing registered national securities exchanges and exempt markets is designed to protect investors and prevent against fraudulent and manipulative trading practices.

What that means is that exchanges that allow for the trading of assets that meet the criteria of “security” under Federal securities law will likely have to register with the SEC (or change the way they present themselves to customers).

So which tokens are securities? Well, the IRS has defined cryptos as investment properties, not securities per say. However, the SEC has been arguing that some ICO tokens are securities. Thus, what this might be implying is that exchanges that allow some specific ICO tokens to be traded (or stored in wallets), need to be registered to continue doing so.

It isn’t totally clear, but nowhere in the document does the SEC imply that all exchanges MUST register, it only says that exchanges that deal in tokens that meet the criteria of securities must register or get an exemption (or logically, not deal in those “securities”).

If this means exchanges either have to register with the SEC, get an exemption, or exclude some tokens… then there are a lot of options for complying.

Further, and this is very important to note… some of the top exchanges (for example Coinbase/GDAX and Gemini) are already registered with the SEC and are already in compliance. Further, other upstanding exchanges of that caliber like Kraken and Bittrex are likely to thrive, operating mostly how they do now if not exactly how they do now.

Meanwhile, as a bonus (glass half full here), the customers of these exchange would have a better sense of being protected (a lot of the SEC statement is focused on warning investors about exchanges acting as if they follow SEC guidelines while not being registered with the SEC).

As an extra bonus, it would make it harder for “random and suspicious crypto site X” to operate in U.S. borders if it framed itself as “a cryptocurrency exchange or broker.”

One could argue that the idea that somehow crypto will become widely embraced, but yet governments and government agencies will not seek to regulate it, is not realistic.

Thus, the best we can hope for in that sense is sensible regulations and not bans. If shady ICOs, Bitconnects, and MtGoxs are regulated against, but otherwise crypto is allowed to thrive, then one can argue that this is likely the best of the realistic cases (the theoretical cases, like the one where no one regulates anything, might theoretically be better… but they aren’t realistic).

Bottomline: The SEC did issue a statement about exchanges, and it does hint that the SEC wants to find a way to ensure those billing themselves as an exchange are following some general rulesets. It appears to me that they are using the fact that they are trying to label some ICOs as securities as a way to get their foot in the door (that part is just theory). Any burden this places on exchanges is certainly unfortunate, but we shouldn’t assume such burdens will inhibit the top exchanges that most of us use. Meanwhile, the bright side of all this is that this is the sort of move that will help stave off some of the worst of what the crypto world has to offer in terms of scams and insecure platforms. Considering the problems that bad ICOs, Bitconnect, and MtGox caused for the crypto community (literally they have cost users billions in Bitcoin and Ethereum), there is likely worse news than “the SEC wants crypto exchanges trading securities to follow some guidelines or get an exemption.” At the very least, this is much better than “full ban on crypto.”

1. Statement on Potentially Unlawful Online Platforms for Trading Digital Assets. SEC.gov.