The US Securities and Exchange Commission (SEC) has said that certain exchanges listing crypto-assets need to register with the agency because they offer trading in products that meet the definition of a “security”.
In particular, it is targeting exchanges that list crypto-assets linked to Initial Coin Offerings (ICOs).
“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,” says the SEC in a statement today.
Later in the statement it notes: “The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not. 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.”
Shortly after this statement was released bitcoin dropped by 13% down to $9,416.
A source at one cryptocurrency focused hedge fund in the US explains that the crypto exchanges have largely existed in a “grey area” when it comes to regulation and says that the ones that have been listing crypto-tokens as well as cryptocurrencies have been at risk of SEC action for some time now.
They point out that this is one reason why liquidity in crypto-assets has become so fragmented across so many venues, because there is a divide between the “exchanges” that don’t accept US dollars and those that do. The former have, until now, been subject to much lighter regulatory demands because they don’t touch fiat currency and therefore tend to list a much wider range of crypto-assets, both tokens and coins.
By contrast, the latter group only list the larger cryptocurrencies and do not offer trading in tokens from ICOs or anything that looks like it could be a security.
“I think there’s been this weird regulatory grey area that permeates the industry and kind of causes this liquidity fragmentation,” they say.
A source at another crypto-focused fund in the UK expresses support for the SEC announcement today, stating that “these things should be regulated”. They agree with the SEC verdict that many of the products being listed on these exchanges are effectively securities and state that greater regulatory clarity is ultimately beneficial to the overall industry.