How Security Laws Could Affect Crytpo Exchanges

The United States Securities and Exchange Commission earlier this year stepped up its enforcement actions against digital currency exchanges and Initial Coin Offerings that aren’t following the federal securities laws.

Because cryptocurrencies are so technical and intricate due to the technology underneath it, the area long operated as a kind of financial Wild West with consumers and unskilled investors falling prey to very risky investments and essentially, frauds. Since November last year, the SEC has issued around four enforcement regulations in relation to cryptocurrency and put the industry on notice that it will be keeping an eye on its actions.

So will crypto exchanges be subject to security laws?

As reported by Crypto Slate, initially:

“Sections 5(a) and 5(c) of the Securities Act of 1933 prohibit the unregistered offer or sale of securities. 15 U.S.C. §§ 77e(a), (c). A security includes ‘an investment contract,’ defined by the Supreme Court as ‘an investment of money in a common enterprise with profits to come solely from the efforts of others.’ S.E.C. v. Edwards, 540 U.S. 389, 393 (2004); 15 U.S.C. §§ 77b–77c.”

The SEC has determined that digital tokens consistently meet this definition and are therefore securities within the definition of the Securities Act. To the extent offerors of virtual tokens that meet this definition fail to register the securities with the SEC, they have basically violated the securities laws.

On top of this, the SEC regulates exchanges and under the Securities Exchange Act of 1934, it is unlawful for an exchange to effect any transactions in security unless the exchange has registered with the Commission as a national securities exchange or is “exempted from such registration.”

According to the Exchange Act, an exchange is “any organization which provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing the functions commonly performed by a stock exchange as that term is generally understood[.]” The SEC has stated that digital currency exchanges may constitute non-exempt exchanges under the Exchange Act.