SEC Warns Investors of Risks in Crypto Investment
The United States Securities and Exchange Commission (SEC) has issued an "investor alert" about the risks of investing in digital assets.
The regulator warns that investments in the cryptocurrency space carry significant risk and could vanish entirely.
The SEC cautions that crypto asset service providers such as exchanges could be in violation of federal securities laws for failing to register with the agency. The regulator also warns platforms involved in lending or staking crypto assets that they could be subject to federal securities laws.
Crypto asset entities could mislead investors
The SEC also warns investors not to trust “proof of reserves” statements published by cryptocurrency companies. “Proof of Reserves” is a term used by crypto asset entities, including trading platforms and entities that issue crypto assets securities, to describe a voluntary method for offering evidence that an entity has sufficient reserve assets to cover what is held for customers and/or accounts at a given point in time.
Crypto asset entities may be offering these types of assessments to satisfy customers that their funds are safe and available upon demand. However, these types of services may not provide any meaningful assurance that these entities hold adequate assets to back their customers’ balances.
SEC issues a Wells notice to Coinbase
Earlier this week, the SEC sent a Wells notice to Coinbase, asserting that the agency has made a preliminary determination recommending filing an enforcement action against the exchange.
The notice targets an “undefined portion” of Coinbase’s listed digital assets, the company’s staking service Coinbase Earn, its institutional arm Coinbase Prime, and its non-custodial Coinbase Wallet. The exchange has welcomed the opportunity to defend its products in court if necessary and notes that it continues to operate as usual on all fronts.
Coinbase defends its products
Coinbase’s chief legal officer, Paul Grewal, argues that the exchange does not list any securities. He says that Coinbase has a rigorous process to analyze and review each digital asset before making it available on the exchange. The company shared it in detail with the SEC as part of its public listing.
However, the SEC’s concerns suggest ongoing regulatory uncertainty surrounding cryptocurrencies and their classification as securities. As such, investors in the crypto space should exercise caution and consider the risks associated with these investments.