The Securities and Exchange Commission (SEC) of the United States recently issued a warning to investors about the risks of investing in “crypto asset securities.” This warning was issued only one day after the regulator delivered to the Coinbase exchange a Wells Notice over several of its products and services related to digital assets.
The Office of Investor Education and Advocacy of the regulatory body issued a public alert informing users that certain cryptocurrency trading platforms might not adhere to federal securities laws. This is consistent with the SEC’s regular warnings to investors to exercise prudence when investing in crypto asset securities.
The SEC urges users to be careful with crypto investments
Investments in crypto asset securities can be exceptionally volatile & speculative, & the platforms where investors buy, sell, borrow/lend these securities may lack important protections for investors.
@SEC_Investor_Ed to investors: exercise caution w/ crypto asset securities.— U.S. Securities and Exchange Commission (@SECGov) March 23, 2023
The March 23 bulletin states that in order to register a securities offering, the issuer must disclose crucial details about the business, the offering, and the securities being made available to the public. Also, an independent public accounting firm registered with the Public Company Accounting Oversight Board must audit their financial statements (PCAOB).
“Registration of a securities offering requires the issuer to disclose important information about the company, the offering, and the securities offered to the public,” the SEC’s Office of Investor Education and Advocacy says.
The statement also made mention of the proof-of-reserves (PoR) initiative that became popular after the crash of the FTX crypto exchange. The SEC asserted that these types of services may not provide any “meaningful” assurance that these entities hold adequate assets to back their customers’ balances.
They caution investors, however, to use extreme caution when relying on proof of reserves to conclude that a crypto asset entity has sufficient reserve assets to meet customer liabilities, or customers will not have to “stand in line” behind other creditors if the entity fails.
The SEC’s Office of Investor Education and Advocacy also cited the extreme volatility that digital assets have been subjected to over the years, claiming that investments in them can be exceptionally risky.
Crypto frauds, bogus coin offerings, Ponzi and pyramid schemes, and celebrity endorsements, are some of the issues related to investing in cryptocurrency asset securities, as maintained by the American SEC.
SEC’s warnings met with harsh responses
Several crypto enthusiasts and community users have responded “harshly” to the SEC’s crypto asset securities investment advice. A user said the recommendations are not possible to follow since the regulator refuses to define what a crypto asset actually is.
“We [are] not idiots; it’s not 1933,” Marty Party, a blockchain architect and forensic expert, said.
Some also criticize the financial regulator, considering the recent collapse of some banking giants in the country. They asserted that the SEC should instead focus on how they could provide real-time information about bank deposit inflows and outflows, as well as unrealized losses.
Additionally, they believe that the SEC should prioritize addressing issues that have a more significant impact on the financial stability of the country rather than delaying the growth of the crypto industry by not defining what a crypto asset is. It is crucial to find a balance between regulating emerging technologies and supporting innovation to promote economic growth.
