Potentially Unlawful’: SEC Sternly Warns Cryptocurrency Exchanges Listing ICOs

The top US securities regulator has signaled its intent to crack down on cryptocurrency exchanges for alleged violations of federal laws governing securities trading.

In a statement dated March 7, the Securities and Exchange Commission (SEC) wrote that cryptocurrency exchanges that list ICO tokens the agency deems to be securities are operating “potentially unlawful” trading platforms.

From the statement:

“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.”

While most token issuers have sought to skirt securities regulations by categorizing their tokens as “utility tokens,” SEC Chairman Jay Clayton has repeatedly said that the majority of ICOs he has observed constitute securities offerings.

As the SEC’s statement indicates, the “security” classification implicates not just companies that distribute their tokens through ICOs but also exchanges that list them on their trading platforms.

The statement warned exchanges that currently support unregistered securities trading that they must register with the SEC as a national securities exchange, an alternative trading system (ATS), or a broker-dealer.

“In advancing the SEC’s mission to protect investors, the SEC staff will continue to focus on platforms that offer trading of digital assets and their compliance with the federal securities laws,” the SEC said.

Notably, fintech firm Circle — which recently acquired cryptocurrency exchange Poloniex — reportedly said during a confidential presentation that the SEC had informally indicated to the firm that it would “not pursue any enforcement action for prior activity” at Poloniex as long as Circle registers the exchange with the SEC and complies with regulations moving forward.

This latest development in the SEC’s crackdown on non-compliant ICO follows the recent report that the agency had issued subpoenas to as many as 80 ICO operators, demanding that they hand over documents related to the structure of their token sales.

Meanwhile, the Financial Crimes Enforcement Network (FinCEN) has suggested in a newly-released letter that companies that hold token sales may be required to register as money transfer businesses under the Bank Secrecy Act and submit to many of the AML/KYC policies that govern financial institutions.