Cryptocurrency Exchanges Supporting Security Tokens Must Register With SEC Or Seek Exemption

On Wednesday, the SEC gave notice that exchanges supporting security tokens must register with the agency or seek exemption. This requirement extends to platforms that facilitate the trading of tokens distributed through initial coin offerings (ICOs), if those digital assets are subject to federal securities law.

  • On March 7, 2018, the US Securities and Exchange Commission (SEC) published a statement on “potentially unlawful online platforms for trading digital assets.”

    Regarding cryptocurrency exchanges, the SEC assessed, “A number of these platforms provide a mechanism for trading assets that meet the definition of a ‘security’ under the federal securities laws.” On that basis, the agency explained, “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 commission added, “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.”

    So, how should investors proceed? This is the SEC’s advice:

    “To get the protections offered by the federal securities laws and SEC oversight when trading digital assets that are securities, investors should use a platform or entity registered with the SEC, such as a national securities exchange, alternative trading system (‘ATS’), or broker-dealer.”

    The commission did not immediately respond to an inquiry about whether there actually are any SEC-registered (or SEC-exempt) platforms that support the trading of digital assets that are securities.

    However, Reuters reported that Liquid M Capital, LLC – broker dealer for Templum – is the only cryptocurrency trading platform registered with the SEC that could be identified thus far. Liquid M Capital operates an alternative trading system, or “ATS.”

    In its statement today, the SEC noted that by calling themselves “exchanges,” many of these platforms might “give the impression” that they are regulated marketplaces, subject to the standards of a national securities exchange and the oversight of the commission.

    In reality, the SEC explained, the agency does not review the listing requirements of these exchanges or the “trading protocols” they might employ. Whether the SEC steps in will depend on what assets are made available for trading.

    The agency also included a list of questions for investors to consider before deciding to trade digital assets on an online trading platform, as reproduced here:

    • “Do you trade securities on this platform? If so, is the platform registered as a national securities exchange (see our link to the list below)?
    • Does the platform operate as an ATS? If so, is the ATS registered as a broker-dealer and has it filed a Form ATS with the SEC (see our link to the list below)?
    • Is there information in FINRA’s BrokerCheck ® about any individuals or firms operating the platform?
    • How does the platform select digital assets for trading?
    • Who can trade on the platform?
    • What are the trading protocols?
    • How are prices set on the platform?
    • Are platform users treated equally? 
    • What are the platform’s fees?
    • How does the platform safeguard users’ trading and personally identifying information? 
    • What are the platform’s protections against cybersecurity threats, such as hacking or intrusions?
    • What other services does the platform provide? Is the platform registered with the SEC for these services?
    • Does the platform hold users’ assets? If so, how are these assets safeguarded?”

    The SEC’s statement occurred one day after it was reported that FinCEN told Senator Ron Wyden that some ICOs might require money transmitter licenses.

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