The U.S. Securities and Exchange Commission (SEC) has issued a warning regarding cryptocurrency exchanges; according to the SEC, some exchanges may be in violation of federal laws governing trading.

A statement issued by the SEC on March 7th stated:

Online trading platforms have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings (“ICOs”). The platforms often claim to give investors the ability to quickly buy and sell digital assets. Many of these platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data.

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. 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.

“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,” read the statement. “Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges.”

The SEC statement included a clear warning to unregistered trading platforms:

A platform that trades securities and operates as an “exchange,” as defined by the federal securities laws, must register as a national securities exchange or operate under an exemption from registration, such as the exception provided for ATSs under SEC Regulation ATS. An SEC-registered national securities exchange must, among other things, have rules designed to prevent fraudulent and manipulative acts and practices…

…Further, a national securities exchange must itself comply with the federal securities laws and must file its rules with the Commission.

“In advancing the SEC’s mission to protect investors, the SEC staff will continue to focus on platforms that offer trading of digital assets and their compliance with the federal securities laws,” the statement concluded.

The statement was issued a week after reports that the SEC has been sending out subpoenas to companies that have launched ICOs. According to TechCrunch, it appeared “that the SEC is requesting details of sale structures and the pre-sale elements to them, which often include deep discounts for those investing large sums or committing to an ICO early on.”

Coindesk reported that “few attorneys or industry stakeholders are willing to talk on the record about the investigations,” and noted thatTechCrunch founder Michael Arrington, “who raised $100 million to start crypto hedge fund, Arrington XRP Capital,” acknowledged receiving a subpoena.

According to Fox Business, the commission has been “looking at several ICOs to ensure they are not violating securities laws.” SEC Chairman Jay Clayton recently told the network that he has observed a significant portion of ICOs and while “it’s a technology that I really think is pretty cool and can change the way people do business at a great deal of efficiency,”  he said he’s found that they qualify as securities offerings and they must follow SEC regulations.

Clayton told Fox Business:

“Many ICOs and many of the ones I’ve looked at specifically are securities….for some reason, people selling ICOs seem to think they don’t need to follow either path; they seem to think they can have the best of both worlds: a limited disclosure from a private placement and public trading and public offering of the token.”

“Abide by the law,” Clayton added. “We are watching. Others are watching.”

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