- SEC staff highlighted what it looks at when assessing investment advisors and broker-dealers involved in digital asset securities.
- The Division of Examinations has noted that some firms don't follow anti-money laundering regulations.
- Additionally, some firms dealing in crypto may need to register as exchanges.
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As and other cryptocurrencies become more popular as alternative investments, financial advisors and brokers need to understand how they can expose their clients to digital assets without also exposing them to legal risk.
Today, the Securities and Exchange Commission Division of Examinations, a staff office separate from the SEC commissioners, issued a “risk alert” that details which compliance practices for digital asset securities the SEC is focused on. The regulatory agency is particularly concerned that some broker-dealers aren’t complying with anti-money laundering regulations and that other firms may be acting as exchanges without registering as such.
SEC's exam division released a risk alert on digital assets. I welcome your feedback: https://t.co/YzPWEefMfh
— Hester Peirce (@HesterPeirce) February 26, 2021
“Risk alert” isn’t so much a whirring red alarm. Rather it’s a way of drawing attention to issues that staff regularly see—and letting investors know, in a sense, what will be on the test.
According to the examinations division, it’s concerned about how investment advisors handle several areas, including portfolio management that adequately assesses and manages risk, accurate books and recordkeeping, custody practices that keep digital assets secure, and disclosures to investors.
Reviews of broker-dealers, meanwhile, will focus on a slightly different set of regulatory compliance issues, one of which is anti-money laundering.
“Certain pseudonymous aspects of distributed ledger technology present unique challenges to the robust implementation of an AML program,” it wrote. According to the note, it’s seen some firms that don’t check to see whether they’re dealing with terrorists, drug traffickers, and others on the US Treasury’s Specially Designated Nationals list.
Moreover, in a section titled “National Securities Exchange,” the letter implies that some firms may effectively be operating as securities exchanges without being registered with the SEC. “Advances in distributed ledger technology have introduced innovative methods for facilitating electronic trading in Digital Asset Securities,” it wrote, likely referring to a whole range of decentralized exchanges and platforms where people can “swap” assets beyond centralized exchanges such as and .
Exchanges have been a battleground for the SEC before. In 2018, the agency cracked down on initial coin offerings (ICOs), which allowed people to invest millions in burgeoning crypto firms and receive tokens in return. Later that year, it issued $400,000 in fines against EtherDelta for operating an “unregistered securities exchange,” which allowed people to trade those same tokens. Throughout, it continued making public statements implying that all -based tokens are unregistered securities. Exchanges like Coinbase (and DEXes too) could very well be trading unregistered securities at this moment, by the SEC's logic.
For years, many in the industry have been calling for the SEC to be more transparent about how it evaluates cryptocurrencies and determines whether they are securities. The SEC has mostly stuck to the Howey Test, a 1940s methodology for assessing whether something is an investment contract, despite the complex nature of digital asset platforms.
While today’s risk alert is far from a comprehensive regulatory framework, it represents an acknowledgment of digital assets’ unique attributes—and reaffirms that cryptocurrency is an increasingly mainstream investment.