SEC Warns Advisers and Broker-Dealers about Digital Assets
The SEC’s Division of Examinations has issued a Risk Alert warning advisers and broker-dealers about the “unique risks” of digital asset securities (e.g. cryptocurrencies, tokens). The staff warns advisers to conduct adequate due diligence about liquidity and volatility; evaluate trading venues, security, and AML procedures; and assess conflicts of interest especially with forked and airdropped digital assets. The Division also urges advisers to consider the myriad regulatory implications including books and records, custody, disclosures, and valuation. The staff also highlights risk for broker-dealers including safekeeping of client assets, registration requirements, AML, conflicts, and outside business activities.
We get it. Digital assets are (relatively) new and raise a host of regulatory issues. However, the time has come for the SEC to write some specific rules about digital asset offerings and trading rather than simply warn everybody about their risks. Mutual funds became popular when the SEC wrote very specific rules (i.e. the Investment Company Act) that addressed conflicts, trading, layering, and fiduciary duty, rather than merely warn the public about the risks.