(The Tokenist) How the SEC is Extending Enforcement Beyond Fraudulent ICOs
The SEC has historically searched for fraud-related cases in the cryptocurrency space when enforcing regulatory requirements.
Now however, they are investigating several investment advisors for potential misconduct, according to numerous anonymous sources.
More particularly, the SEC is focusing on the ways in which SEC-registered investment advisors have stored the cryptocurrency assets they hold, in addition to price manipulation.
The SEC is legally required to mandate all investment advisors who manage at least $100 million in client assets.
Usually, these include institutional investors such as hedge funds or private equity funds.
When it comes to the custody of stocks and bonds, SEC legislation requires an investment advisor to keep the securities at a bank or a brokerage firm. Yet when it comes to digital currencies, these are maintained in a digital wallet. Only a select few companies offer cryptocurrency custody services, such as those offered by BitGo.
When investment advisors fail to have policies in place which outline the technicalities of secure custody procedures, they run the risk of failing to meet SEC compliance.
Besides the custody concern, the SEC is apparently worried about cryptocurrency price manipulation as well. Digital currencies are usually traded on unregulated exchanges, unlike stocks. The purpose of such regulation— holds the SEC— is to prevent such manipulation.
Various financial experts provided their suggestions in lieu of official guidance from the SEC.
Gail Bernstein acts as General Council for the Investment Advisor Association, which represents more than 600 SEC-registered advisory firms. She provided the following comments:
“Advisors should think about investments in crypto assets the same way they think about any investments, through the lens of their fiduciary duty and compliance programs. Typically, after a sweep of this type, the SEC staff will publish its findings and observations, and that can provide very helpful guidance for advisors as they consider their compliance obligations.”
Timothy Spangler, a partner at Dechert LLP Law Firm in California, perceives the recent SEC action as targeting those who fail to consider risks in the crypto space:
“I think where the SEC is concerned is where there is evidence that the registered investment advisor didn’t spend enough time thinking about the risks.”
How Does the Crackdown Impact Security Tokens?
Interestingly enough, the majority of security tokens do want regulated exchanges in the cryptocurrency space. Securities come with pre-existing laws, which various compliance protocols aim to enforce through the process of tokenizing securities.
The recent concerns by the SEC do not seem to apply to blockchain’s newest realm: security tokens.
While the cryptocurrency space continues to wait for clarification from the SEC and other regulatory bodies throughout the globe, these also seem to concern the ICO-phase.
The question here centers around the definition of a security, especially when related to digital currencies and crowdfunding. SEC Chairman Jay Clayton has publicly stated that virtually all ICOs he has seen, constitute securities. Yet this also does not apply to the tokenization of pre-existing financial securities.
So long as security tokens abide by the pre-existing securities laws, many believe that no legitimate issues will arise.
