In brief:
The US Securities and Exchange Commission (SEC) has issued a warning against potentially unlawful platforms trading digital assets.

The US Securities and Exchange Commission (SEC), the top US securities regulator has issued a warning to the cryptocurrency exchanges that list security tokens without registering with the SEC or seek an exemption are in violation of federal regulations.

In the official notice issued on March 7, SEC stated that cryptocurrency exchanges that list ICO tokens which are considered to be securities by the agency are operating as “potentially unlawful” trading platforms.

“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,” the agency wrote.

Unlike initial public offering for a company, investors in an initial coin offering (ICO) buy crypto tokens or coins instead of stock. In order to evade securities regulations, most of the token issuers categorize their tokens as “utility tokens.” The “security” classification involves companies distributing their tokens through ICOs as well as exchanges listing them on their trading platforms.

Time and again, Jay Clayton, SEC Chairman has asserted that the majority of ICOs he has observed constitute securities offerings. The unregistered securities trading platforms are warned about the need be registered with the SEC, such as a national securities exchange, an alternative trading system (ATS), or a broker-dealer.

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

Recently Circle, a fintech firm took over cryptocurrency exchange Poloniex. Interestingly, the firm stated that the SEC had informally pointed out that if Circle registers the exchange with the SEC and fulfills all regulations, it would “not take any enforcement action for prior activity” at Poloniex. It is noteworthy that prior to issuing such warnings against non-compliant ICOs, the agency had also issued subpoenas to around 80 ICO operators.

Moreover, the Financial Crimes Enforcement Network (FinCEN) has issued a letter, explaining that companies holding token sales need to get registered as money transfer businesses under the Bank Secrecy Act in addition to submitting the AML/KYC policies.

SEC’s intent of weeding out bad actors from the space has been made clear with its recent actions, and now it is to be seen to what degree will the SEC enforce such regulations and whether the exchanges will bear any penalties for past violations.

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