What has happened?

The US Securities and Exchange Commission has issued another statement on digital assets, this time reminding online platforms that trade digital assets that they may have to be SEC-registered to trade lawfully.

What does this mean?

In a public statement, the SEC said it was concerned that many online trading platforms may be giving investors the false impression they are SEC-registered and regulated by labelling themselves "exchanges".

"The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not," the statement reads.

If a platform trades digital assets that are securities and operates as an exchange, then it must register with the SEC as a national securities exchange or be exempt from registration, the regulator advised market participants.

"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 exemption provided for [alternative trading systems]," the statement explains.

The SEC warned investors that some of the platforms claim to follow certain rules and standards when choosing digital assets but these are not in fact reviewed, or indeed approved, by the SEC.

Further, the SEC does not review the trading protocols used on the platforms and the information contained in their order books may not have the same integrity as that provided by national securities exchanges.

Organisations that want to operate as an alternative trading system (ATS) are also subject to various requirements, including registering with the SEC as a broker-dealer and becoming a member of a self-regulatory organisation.

"Registration as a broker-dealer subjects the ATS to a host of regulatory requirements, such as the requirement to have reasonable policies and procedures to prevent the misuse of material non-public information, books and records requirements, and financial responsibility rules, including, as applicable, requirements concerning the safeguarding and custody of customer funds and securities."

The regulator added that some platforms may not meet the definition of exchanges but offer other services related, such as digital wallets services, which may trigger other registration requirements, including broker-dealer, transfer agent or clearing agency registration.

What questions should investors ask themselves?

  • "Do you trade securities on this platform? If so, is the platform registered as a national securities exchange?
  • 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?
  • 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?"

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