How Digital Assets Are Being Legally Regulated
As cryptocurrency has quickly gained legitimacy and popularity over the past few years, the SEC has begun to roll out laws and regulations regarding its use. Whether it’s ICO’s, crypto securities, or even Bitcoin ETF proposals, the SEC is always working towards updating or modifying its rules in order to best serve the people when dealing with cryptocurrency. Let’s take a closer look at what the SEC has been working on regarding its regulations of cryptocurrency.
This is not financial investment advice.
This article touches on key points regarding cryptocurrency regulation by the SEC
Securities And Exchange Commission (SEC): The U.S. Securities and Exchange Commission (SEC) is an independent federal government agency responsible for protecting investors, maintaining fair and orderly functioning of securities markets and facilitating capital formation.
Initial Coin Offering (ICO): Short for Initial Coin Offering, a means by which funds are raised for a new venture, where some of the cryptocurrency is sold to early backers of the project.
Security: A security is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity’s bond), or rights to ownership as represented by an option.
Exchange: An exchange is a marketplace in which securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any securities trading on that exchange.
Exchange-Traded Fund (ETF): An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.
Familiarize yourself with the aforementioned terms in order to gain a better understanding of how the SEC functions as a whole.
So what exactly does the SEC do? More importantly, why does the SEC even exist and what’s so significant about its role in today’s world of finance? Well, it turns out that the answer to all of these questions goes back to the 1930s. The SEC was created by Congress in 1934 as the first federal regulator of securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States. Essentially, the SEC acts as the middleman between investors and the people who they want to place capital for. As long as there is no fraudulent activity going on, the SEC will have nothing to interfere with.
Actually, you do have to go through the SEC when certain securities are being offered to investors. Generally, issues of securities offered in interstate commerce, through the mail or on the Internet, must be registered with the SEC before they can be sold to investors. Financial services firms, advisory firms, and asset managers — as well as their professional representatives — must also register with the SEC to conduct business. This way, both sides of the spectrum are being validated by the SEC, further reducing any potential fraudulent behavior. Afterall, the SEC’s primary function is to oversee organizations and individuals in the securities markets, including securities exchanges, brokerage firms, dealers, investment advisors and various investment funds.
Sometimes, people see the SEC as a deterrent in the process of setting up financial organizations. Instead of having to wait and make sure that the SEC has fully approved of your plans, why not just begin operations without having to deal with this hassle? Unfortunately, it’s not this easy. Through established securities rules and regulations, the SEC promotes disclosure and sharing of market-related information, fair dealing, and protection against fraud. It provides investors with access to registration statements, periodic financial reports and other securities forms through its comprehensive [electronic, data gathering, analysis and retrieval (EDGAR) database](electronic, data gathering, analysis and retrieval (EDGAR) database). Overall, the SEC serves as you’re one stop shop for everything that falls under financial regulation, preventing fraudulent activity, and validating financial businesses.
The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States. Essentially, the SEC acts as the middleman between investors and the people who they want to place capital for.
So now that you’re aware of what the SEC is, what it does, and how it came to be, you may be wondering what it has to do with cryptocurrency? Given the recent rise in popularity and legitimacy of digital assets such as cryptocurrency, new laws and regulations have been put forth by the SEC to contain any fraudulent activity. Given how “scammy” and unreliable recent ICO’s have been, it actually makes sense for the SEC to step in and make sure that nothing illegal is happening behind their backs. As such, the SEC has been (and is currently) implementing new regulations on ICO’s and crypto assets as a whole, so let’s take a look at how the SEC officially views them according to its website.
Remember, ICO’s pose a relatively new way of raising capital for companies and projects seeking to accumulate additional funding. As such, these companies and individuals are increasingly considering initial coin offerings as a way to raise capital or participate in investment opportunities. While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring an [increased risk of fraud and manipulation](increased risk of fraud and manipulation) because the markets for these assets are less regulated than traditional capital markets, according to the SEC itself.
ICOs, based on specific facts, may be considered securities offerings and fall under the SEC’s jurisdiction of enforcing federal securities laws. ICOs that are securities most likely need to be registered with the SEC or fall under an exemption to registration. While some ICOs may be attempts at honest investment opportunities, many may be frauds, separating you from your hard-earned money with promises of guaranteed returns and future fortunes. They may also present substantial risks for loss or manipulation, including through hacking, with little recourse for victims after-the-fact.
Recently, the SEC gave its much awaited ruling regarding a potential Bitcoin ETF. Unfortunately, all nine Bitcoin ETF proposals were rejected although the agency did note that this rejection doesn’t have anything to do with whether Bitcoin and blockchain technology have utility or value as an investment. Instead, the SEC found that none of the exchanges could satisfactorily demonstrate their ability to prevent fraudulent and manipulative acts and practices.
The SEC has been and will continue to implement new regulations regarding cryptocurrency and ICO’s, following its meteoric rise in popularity.
In case you’re freaking about all the new information that you’ve just processed regarding the SEC, don’t worry about it. It’s okay not to be completely caught up with all the news surrounding the laws and regulations of digital assets which fall under SEC jurisdiction. Nonetheless, any educated crypto enthusiast will occasionally read up on the news and recent activity in this space, so here are some of the best ways to stay updated with these developments.
Read the SEC website every once in a while. You don’t need to be an expert on everything that’s listed on their website, but it definitely helps to be knowledgeable on major regulations.
Follow crypto news sites and social media. If you don’t have time to check out the SEC website, make sure that your news and social media feed is filled with accounts that do have time to do this.
Join Telegram channels which continuously update you with all the necessary information and news regarding SEC rulings. This will, again, make you knowledgeable about crypto rules without having to go through the hassle of reading the website.
Overall, the SEC plays a significant role in the development of the crypto market. Even just one positive regulatory decision can completely change up the way that a majority of people view digital assets like Bitcoin. More importantly, regulations made and implemented by the SEC can have a direct impact on price movements within the market, making the SEC a little more important than you may have originally thought. Regardless, it’s always important to keep up with the new regulations and laws that are being put forth by the SEC for cryptocurrencies.
Do you think that the SEC is being too harsh on its cryptocurrency regulations?
Let us know why in the comments!
