SEC Urges Caution on Crypto Investing

investopedia.com:

The Securities and Exchange Commission (SEC) has issued an alert reminding investors that cryptocurrency offerings may be illegal because they are not registered with the regulator.

The move is in line with the string of regulatory actions brought against numerous crypto platforms since October 2022, when FTX famously imploded. To date, the regulator has gone after Terra, Coinbase, Kraken, Paxos, and Binance, claiming the companies violated investor protection laws or had illegal securities offerings. Just yesterday, the SEC took action against the founder of Tron and celebrities that touted investments in the cryptocurrency.

According to the alert, crypto exchanges may offer a combination of services that are normally offered by separate firms. By offering exchange, broker-dealer and custodial functions, platforms create conflicts of interest that pose a risk to investors.

SEC-registered entities must comply with a number of rules to protect investors. However, according to the regulator, “none of the major crypto asset entities is registered with the SEC as a broker-dealer, exchange, or investment adviser—so investors may not get the protections afforded by the rules applicable to these entities.”

The regulator also addressed proof of reserves, which has been commonly used to show an entity has enough reserves to cover the amount held in customer accounts. This proof assures customers that their funds are safe and available to withdraw on demand. 

“These types of services may not provide any meaningful assurance that these entities hold adequate assets to back their customers’ balances. Further, crypto asset entities might use these in lieu of audited financial statements in order to obscure and confuse customers about