SEC Crackdown Sparks Crypto Carnage, Bitcoin Below $10k

Following a crackdown by SEC on “potentially unlawful Online Platforms for trading digital assets“, Bitcoin and its crypto peers are tumbling…

Disappointment among Ripple holders last night with Coinbase is not helping but there is no clear catalyst for this most recent leg…

 

And Bitcoin is plunging back below $10k on heavy volume…

 

Some of the overnight headlines that weighed on crypto are:

Mt. Gox Trustee Sells 43b Yen Worth of Bitcoin, Bitcoin Cash

Mt. Gox trustee says it sold certain amount of bitcoin and bitcoin cash that belonged to the bankruptcy estate with the permission of the court to secure money for distribution resources.

Bitflyer Says It’s Experiencing Service Interruption

The Japanese cryptocurrency exchange has been experiencing an interruption to its services since around 3:10pm local time; “recovery efforts are in progress,” according to Twitter post.

Japan Looking to Penalize Some Cryptocurrency Exchanges: Nikkei

Japan’s Financial Services Agency is considering issuing suspension orders to some of the exchanges, the Nikkei newspaper reported, without citing anyone.

But this leg down at 1130ET is not related. It appears the following statement from SEC is driving the plunge…

Statement on Potentially Unlawful Online Platforms for Trading Digital Assets

Divisions of Enforcement and Trading and Markets

March 7, 2018

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.

Considerations for Investors Using Online Trading Platforms

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 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.  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.  Likewise, the SEC does not review the trading protocols used by these platforms, which determine how orders interact and execute, and access to a platform’s trading services may not be the same for all users.  Again, investors should not assume the trading protocols meet the standards of an SEC-registered national securities exchange.  Lastly, many of these platforms give the impression that they perform exchange-like functions by offering order books with updated bid and ask pricing and data about executions on the system, but there is no reason to believe that such information has the same integrity as that provided by national securities exchanges.

In light of the foregoing, here are some questions investors should ask before they decide to trade digital assets on an online trading platform: 

  • 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?

We encourage market participants who are employing new technologies to develop trading platforms to consult with legal counsel to aid in their analysis of federal securities law issues and to contact SEC staff, as needed.