"Get out of crypto platforms immediately! Regulatory crackdown is just beginning," says SEC lawyer with 20 years of experience - What are the reasons behind this statement?
"My view is that the SEC is right in its enforcement actions related to cryptocurrency. Regardless of what those soliciting customers promise, cryptocurrency exchanges are high-risk, dangerous, and inherently insecure, this is beyond dispute. Please continue reading to understand my explanation." said John Reed Stark, a lawyer who has worked at the SEC for over 20 years. During his tenure, he served as Chief of the SEC's Office of Internet Enforcement for 11 years. He believes:
Cryptocurrency is now under scrutiny and enforcement by U.S. regulators, but this is just the beginning.
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Why is the SEC Targeting Cryptocurrency Exchanges?
John Reed Stark stated that traditional financial service companies handle investor funds with extreme care to provide sufficient protection to users. The SEC can also monitor companies registered with the SEC limitlessly and in real-time.
However, for cryptocurrency exchanges, the SEC lacks any form of supervision and visiting rights, limiting its ability to detect, investigate, and prevent fraudulent activities.
Why does the SEC Require Cryptocurrency Exchanges to Register?
John Reed Stark highlighted several points:
- It lacks a transparent oversight mechanism like traditional SEC-registered brokers or investment advisors, preventing the SEC from analyzing or verifying market transactions, clearing activities, customer identities, and other key data related to risks and fraud
- The SEC cannot detect individual misconduct and enforce penalties for violations, including individual activities such as cryptocurrency trading, operations, and promotions, all of which require relevant licenses at the SEC
- Cryptocurrency companies should have an accountability structure and fiduciaries for every user's protection
- Cryptocurrency companies should have compliance systems, personnel, and infrastructure; the SEC currently cannot determine the origins of these cryptocurrencies or who holds the majority
- Cryptocurrency companies lack the norm of verification and investigation; the SEC or FINRA cannot inspect, supervise, or verify crucial customer protection and compliance mechanisms
What are the Benefits for Users of Exchanges Registered with the SEC?
John Reed Stark pointed out several benefits:
- The SEC will require investors' funds and securities to be handled appropriately, without conflicts of interest
- Ensuring investors understand the illiquidity and speculative risks associated with trading on cryptocurrency platforms
- Allowing buyers to understand the final prices of securities traded on cryptocurrency platforms
- Providing sufficient information disclosure, trading policies, practices, and procedures
Can Exchanges Operate Without Regulation?
John Reed Stark believes that most cryptocurrency exchanges are not lacking user protection but are severely deficient.
- No requirements for record-keeping and archiving related to operations, communications, trading, or any other business
- No requirements for trading prices or order flow, or regulations for employee use of internal platforms and payment systems
- Failure to comply with U.S. laws and regulations: prohibiting manipulation, insider trading, frontrunning, and fraud by users or employees
- No mandatory internet security requirements or standards to protect customer privacy
- No requirements for mandatory training or codes of conduct
- No internal compliance, customer service, and whistleblower team to handle and archive customer complaints
- No requirement for chargebacks in case of disputes or issues
- No obligation to follow publicly disclosed national best bid and offer prices and other relevant best execution requirements
- No minimum financial standards for operations, liquidity, and net capital
- No team of objective auditors and inspectors from the U.S. government to examine and review the fairness, execution, and transparency of transactions
- Requirements for the consistency of trading operations, i.e., the same trading protocols (determining how orders interact and execute) and access to platform trading services are the same for all users
- No restrictions on employee participation in cryptocurrency and NFT investments, akin to Wall Street firms setting IPO and options prohibitions for their employees
All of these are straightforward and common-sense. Registration with the SEC is crucial to establish mechanisms that protect investors from individual risks and safeguard capital markets from global systemic risks. Without registration, necessary regulatory mechanisms and protections are absent, leaving investors unsupervised and unprotected.