On March 7, 2018 the U.S. Securities and Exchange Commission (SEC) released a "Statement on Potentially Unlawful Online Platforms for Trading Digital Assets". The statement is a warning to investors, service providers operating platforms through which digital assets are traded, and those providing ancillary services involving the transfer or maintenance of digital assets
With regard to investors, the SEC's principal suggestion was to conduct diligence to ensure online trading platforms with which investors engage are SEC-registered and regulated marketplaces, whether as national securities exchanges, alternative trading systems, or broker-dealers.
For market participants operating online trading platforms, the SEC has confirmed that platforms which are effectively operating as an exchange, specifically by trading assets fitting into the definition of a "security" under U.S. federal securities laws, must either register as a national securities exchange or be exempt from registration, for example, by falling into the alternative trading system exemption.
Focusing on national securities exchanges, these platforms must "have rules designed to prevent fraudulent and manipulative acts and practices... have rules and procedures governing the discipline of its members and persons associated with its members, and enforce compliance by its members and persons associated with its members with the federal securities laws and the rules of the exchange". The national securities exchange itself must also comply with federal securities laws and file its rules with the SEC. As a cautionary note, a platform may be deemed to be participating in the unregistered offer and sale of securities if digital assets that fall under the definition of "security" are being offered and/or sold on the platform and the securities are not registered or exempt from registration.
Focusing on alternative trading systems, these platforms must become a member of a self-regulatory organization and register with the SEC as a broker-dealer. A number of additional regulatory requirements will apply, such as requirements for "reasonable policies and procedures to prevent the misuse of material non-public information, books and records requirements, and financial responsibility rules…" Self-regulatory organization membership further imposes additional regulatory requirements and rules.
Finally, for those platforms which do not meet the definition of a national securities exchange but directly or indirectly offer trading or other services related to digital assets that fall under the definition of "security", certain regulations may still apply. For example, digital wallet services may trigger broker-dealer, transfer agent or clearing agency registration requirements under federal securities legislation.
The original statement may be viewed on the SEC’s website.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
