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The U.S. Securities and Exchange Commission has issued an advisory notice warning investors to be wary of risks associated with crypto asset securities in light of recent enforcement action against various crypto businesses and celebrities. According to the U.S. securities regulator, certain businesses that provide investments in or services related to cryptocurrencies “may not comply with applicable legislation, including federal securities regulations.”
Securities Watchdog Warns of Risks Associated With Crypto Asset Securities Amid Recent Enforcement Action
In a “Investor Warning” released on March 23, 2023, the U.S. Securities and Exchange Commission (SEC) advises investors to “take caution” while dealing with “crypto asset securities.” The SEC states that anyone considering investing in a cryptocurrency asset should be aware that these investments can be “exceptionally volatile and speculative, and the platforms where investors buy, sell, borrow, or lend these assets may lack critical investor safeguards.”
The SEC also discusses and minimizes using the proof-of-reserves (POR) technique of transparency by cryptocurrency companies like exchanges. According to the regulator, POR techniques “may only provide a snapshot” of a certain moment in time, and proof-of-reserves may not reveal liabilities or the “usage of client crypto assets in crypto asset lending.” POR snapshots can be taken, but they “do not give protection against the company relocating client assets,” the SEC further emphasized.
According to the SEC, “a proof-of-reserves is not as thorough or as rigorous as a financial statement audit and may not provide any level of assurance.”
The SEC’s advisory warning comes after the agency recently filed a lawsuit against Do Kwon, the CEO of Terraform Labs, Justin Sun, the founder of Tron, and Coinbase. In recent months, the regulator has also brought charges against several famous people, including the socialite Kim Kardashian, the NBA Hall of Famer Paul Pierce, the actress Lindsay Lohan, and the YouTuber Jake Paul.
‘So-Called Crypto Exchanges’ Commingle Operations That Many SEC Registered Organizations Handle
According to the investor notice from the SEC, “so-called crypto exchanges” are not SEC-registered organizations and provide a variety of services that are “usually conducted by distinct firms that may each be required to be individually registered with the SEC, a state regulator, or a [self-regulatory body],” according to the investor alert. The regulatory body states that mixing up these operations “creates conflicts of interest and hazards for investors.”
The SEC also notes that the cryptocurrency market has been “exceptionally volatile” over the past 12 months and that significant enterprises have gone bankrupt in the sector. The agency continued, “Fraudsters continue to take advantage of the growing popularity of crypto assets to entice regular investors into scams, frequently resulting in severe losses. The regulator’s advisory notice also comes after SEC Chair Gary Gensler expressed his views in an interview with New York Magazine’s Intelligencer.
In the interview, Gensler outlined the reasons for classifying all cryptocurrencies besides bitcoin (BTC) as securities. Moreover, Ethereum (ETH) was recently designated a security in a lawsuit against the cryptocurrency exchange Kucoin by New York Attorney General Letitia James.
Rostin Behnam, the head of the Commodities Futures Trading Commission, has claimed that bitcoin is a commodity. Behnam made comments on Gensler’s Intelligencer interview, and Ripple’s chief legal officer recently stated that Gensler may “recuse himself from voting on any enforcement matter” as a result of his Intelligencer commentary.
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