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Cryptocurrency and ICO Activity at Brokerages Catches SEC Scrutiny

August 3, 2018

The SEC is actively scrutinizing how brokerages are involved in cryptocurrencies, two people familiar with the matter tell Bloomberg.

The regulator’s examiners have been asking brokerage firms in recent weeks about fees charged in financing and trading cryptocurrencies and initial coin offerings, a person who asked not to be named tells the news service.

Another person tells Bloomberg the SEC is also collecting data on the involvement of investment advisors in cryptocurrencies.

The regulator’s staff is also asking about firms’ clearing agreements and personnel matters when it comes to initial coin offerings, according to the news service. The SEC’s current review follows requests for information the SEC sent to hedge funds regarding digital investment pricing, Bloomberg writes.

No major Wall Street banks currently trade in cryptocurrencies, while most of those that do are typically smaller brokerages, according to the news service.

SEC chairman Jay Clayton issued a statement in December that while cryptocurrencies could eventually offer new opportunities, they also offer less investor protection than traditional investments and therefore present more opportunity for fraud. A spokeswoman for Clayton declined comment to Bloomberg.

Over the past year, the SEC’s enforcement division has gone after firms it accuses of violating securities laws in their coin offerings, Bloomberg writes. And Justice Department lawyers are conducting a criminal probe into whether there’s manipulation of the price of bitcoin and other cryptocurrencies, according to the news service.

Industry self-regulator Finra told its members last month they should notify it about any activity related to digital assets such as cryptocurrencies. And the National Futures Association, the derivatives’ industry self-funded watchdog, told the Commodity Futures Trading Commission last month it’s going to require additional disclosures from companies dealing in cryptocurrency derivatives, according to Bloomberg.

“They’re trying to understand the whole ecosystem,” John Jacobs, executive director of Georgetown University’s Center for Financial Markets and Policy, said about the regulators’ inquiries, according to the news service. “They’re still wrestling with how to make sure that this an organized efficient marketplace.”

Last month the SEC rejected a proposal for an exchange traded fund connected to bitcoin, which would have been the first of its kind. Nonetheless, the regulator noted that its decision in the case of the cryptocurrency ETF “does not rest on an evaluation of whetherbitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.”

By Alex Padalka
  • To read the Bloomberg article cited in this story, click here.