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| SEC Warns Investors to Exercise Caution When Dealing with Crypto Asset Securities Amid Recent Enforcement Action |
The U.S. Securities and Exchange Commission (SEC) has issued an advisory notice to investors to exercise caution when dealing with crypto asset securities. The SEC highlights that crypto asset investments or services offered by certain entities may not be compliant with applicable law, including federal securities laws. The notice comes after recent enforcement action against various crypto entities and celebrities. The regulator warned investors that cryptocurrencies can be volatile and speculative, and that the platforms where investors buy, sell, borrow, or lend these securities may lack important protections.
In the advisory notice, the SEC downplayed the proof-of-reserves (POR) method of transparency used by crypto businesses like exchanges. The regulator explained that POR methods may only provide a snapshot of a point in time and may not show liabilities or the use of customer crypto assets in crypto asset lending. The SEC emphasized that POR snapshots do not offer protection against the entity moving customer assets.
The SEC highlighted the commingling of operations in so-called crypto exchanges, which create conflicts of interest and risks for investors. The regulator explained that crypto exchanges offer a combination of services that are typically performed by separate firms that may each be required to be separately registered with the SEC, a state regulator, or a self-regulatory organization.
The SEC’s advisory notice follows its recent lawsuit against Terraform Labs CEO Do Kwon, Tron’s Justin Sun, and the agency’s sending of a Wells Notice to Coinbase. The regulator has recently charged a number of celebrities, including socialite Kim Kardashian, NBA Hall of Famer Paul Pierce, actress Lindsay Lohan, and YouTuber Jake Paul. This move also follows SEC Chair Gary Gensler expressing his opinions during an interview with New York Magazine’s Intelligencer. In the interview, Gensler explained why he considers all crypto assets other than Bitcoin as securities.
While the SEC has issued this warning, there are differing opinions on whether certain crypto assets are securities or commodities. New York Attorney General Letitia James recently declared Ethereum a security in a lawsuit against the crypto exchange Kucoin. However, Chairman of the Commodity Futures Trading Commission, Rostin Behnam, has insisted that Ethereum is a commodity. Ripple’s Chief Legal Officer has also recently commented on Gensler’s Intelligencer interview, suggesting he should recuse himself from voting on any enforcement case.
