On March 7, 2018, the SEC issued a statement warning investors about the use of online trading platforms for digital tokens and currencies, and indicated that it will "focus" future efforts on determining whether such platforms are in "compliance with federal securities laws."

The statement, issued jointly by the SEC's Enforcement and Trading and Markets Divisions, laid out what it called "considerations" both for investors using the online trading platforms, as well as for the platforms themselves.

For investors, the SEC expressed concerns that online trading platforms for digital assets may incorrectly appear to investors to be SEC-registered or regulated markets. It reminded investors that, unless a marketplace is registered with the SEC as a "national securities exchange" or exempt from registration and operating under SEC Regulation ATS (for Alternative Trading System), there is no regulatory oversight of the way in which the marketplace operates. For example, the SEC noted that when it comes to unregulated online trading platforms, there can be no assurance about the platforms' claims regarding: 

  • The criteria used to select digital assets that trade;
  • Trading protocols and whether they are consistently followed;
  • How orders interact and execute;
  • Whether posted bid and ask data about executions on the system are accurate; and
  • Whether the platform's trading services are offered to all users on an equal basis. 

Perhaps most notably, the SEC's statement also strongly suggests that by simply referring to itself as an "exchange," a trading platform may be misleading investors into thinking it is SEC regulated or meets the standards of a regulated exchange.

The SEC also directed part of its statement to online trading platforms, noting that platforms facilitating trading in digital assets which may be "securities," must be registered with the SEC as an exchange or operating under an applicable exemption, such as Regulation ATS. In the latter case, Regulation ATS itself requires the online platform to register with the SEC under Section 15 of the Exchange Act as a broker-dealer and to join a self-regulatory organization.  Online platforms that may not meet the definition of "exchange" but offer other services related to security-tokens - such as digital wallets - may nevertheless be subject to other securities law requirements, such as SEC registration as a broker-dealer, transfer agent or clearing agency.

Not addressed by the SEC's statement are non-securities regulatory questions faced by online trading platforms. For example, online platforms that deliberately exclude security-tokens and avoid taking custody of traders' digital assets to avoid implicating the securities laws may nevertheless be required to register with FinCEN as a "money service business," among other things.

Given the heightened and continued interest by the SEC into trading platforms for digital tokens and currencies, we strongly encourage operators of platforms to seek guidance from counsel, a point that the SEC itself echoed at the close of its March 7 statement: "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 the SEC staff, as needed..."

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