Investors Should Only Use an Online Digital Trading Platform or Entity Registered with the SEC

Recently, the SEC published a public statement about online trading platforms where investors can buy and sell digital assets, including coins and tokens offered and sold in Initial Coin Offerings (“ICOs”).  Often, the online trading platforms claim to give investors the ability to quickly buy and sell digital assets, and many platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data.

Further, a number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws.  If a platform, according to the SEC, 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 federal regulatory framework governing registered national securities exchanges and exempt markets is designed to protect investors and prevent against fraudulent and manipulative trading practices.

Investors Should Use a Platform or Entity Registered with the SEC When Trading Digital Assets

To get the protections offered by the federal securities laws and SEC oversight when trading digital assets that are securities, investors should use a platform or entity registered with the SEC, such as a national securities exchange, alternative trading system (“ATS”), or broker-dealer.

Investors Should NOT ASSUME Online Trading Platforms Are SEC-Registered and Regulated Marketplaces

Many online trading platforms appear to investors as SEC-registered and regulated marketplaces when, in fact, they are not.  Many trading platforms refer to themselves as “exchanges,” which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.  Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges.  The SEC also does not review the trading protocols used by these platforms, which determine how orders interact and execute, and access to a platform’s trading services may not be the same for all users.  The SEC cautions investors NOT TO ASSUME that the trading protocols meet the standards of an SEC-registered national securities exchange.  Finally, many of these platforms give the impression that they perform exchange-like functions by offering order books with updated bid and ask pricing and data about executions on the system, but there is no reason to believe that such information has the same integrity as that provided by national securities exchanges.

Questions the SEC Reminds Investors to Ask Before Trading Digital Assets Via an Online Trading Platform

Is the online trading platform registered as a national securities exchange, a securities exchange that has registered with the SEC under Section 6 of the Securities Exchange Act of 1934?  Please click here for a list of active national securities exchanges registered with the SEC under Section 6(a) of the Exchange Act.

Is the online trading platform operating as an alternative trading system, and if it is, has the ATS registered as a broker-dealer which has filed a Form ATS with the SEC?  Please click here for the SEC’s list of active alternative trading systems.

Have you check for information in FINRA’s BrokerCheck ® about any individuals or firms operating the online trading platform?

How does the platform select digital assets for trading?  Who can trade on the platform?

What are the trading protocols?  How are prices set on the platform?

Are platform users treated equally?  What are the platform’s fees?

How does the platform safeguard users’ trading and personally identifying information? 

What are the platform’s protections against cybersecurity threats, such as hacking or intrusions?

What other services does the platform provide?  Is the platform registered with the SEC for these services?

Does the platform hold users’ assets?  If so, how are these assets safeguarded?

Online Trading Platforms and Alternative Trading Systems – Other Considerations

A platform that trades securities and operates as an “exchange,” as defined by the federal securities laws, must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for ATSs under SEC Regulation ATS.  An SEC-registered national securities exchange must, among other things, have rules designed to prevent fraudulent and manipulative acts and practices.  Additionally, as a self-regulatory organization (“SRO”), an SEC-registered national securities exchange must have rules and procedures governing the discipline of its members and persons associated with its members and enforce compliance by its members and persons associated with its members with the federal securities laws and the rules of the exchange.  Further, a national securities exchange must itself comply with the federal securities laws and must file its rules with the SEC.

An entity seeking to operate as an ATS is also subject to regulatory requirements, including registering with the SEC as a broker-dealer and becoming a member of an SRO.  Registration as a broker-dealer subjects the ATS to a host of regulatory requirements, such as the requirement to have reasonable policies and procedures to prevent the misuse of material non-public information, books and records requirements, and financial responsibility rules, including, as applicable, requirements concerning the safeguarding and custody of customer funds and securities.  The overlay of SRO membership imposes further regulatory requirements and oversight.  An ATS must comply with the federal securities laws and its SRO’s rules, and file a Form ATS with the SEC.

Some online trading platforms may not meet the definition of an exchange under the federal securities laws, but directly or indirectly offer trading or other services related to digital assets that are securities.  For example, some platforms offer digital wallet services (to hold or store digital assets) or transact in digital assets that are securities.  These and other services offered by platforms may trigger other registration requirements under the federal securities laws, including broker-dealer, transfer agent, or clearing agency registration, among other things.  In addition, a platform that offers digital assets that are securities may be participating in the unregistered offer and sale of securities if those securities are not registered or exempt from registration.

See also Regulation of Exchanges and Alternative Trading Systems.


SEC Cautions Investors Using Online Digital Trading Platforms

Image: Pixabay, Gerd Altmann (Geralt), CC0 1.0 Universal

Cryptocurrency & Initial Coin Offering Investors

If you are a cryptocurrency or Initial Coin Offering investor who has suffered investment losses and have questions or concerns about your potential legal rights or claims, please complete the form above on the right or e-mail [email protected].  Alternatively, please contact John Kehoe, Esq., [email protected], (215) 792-6676, Ext. 801.

Kehoe Law Firm, P.C.