The U.S. Securities and Exchange Commission (SEC) released its top priorities for 2023 on Feb. 7, in which it highlighted the need for greater attention to those advising investors to participate in crypto projects without proper accreditations.
Alongside an initiative to ensure registered investment advisers (RIAs) have “adopted and implemented written policies and procedures that are reasonably designed to prevent violations by the advisers,” the SEC spotlighted crypto asset advisers specifically as a core focus area.
U.S. crypto regulation
The SEC statement referenced the broader segment of “emerging financial technologies” in a “Emerging Technologies and Crypto-Assets” section as a catch-all for the fast-moving blockchain industry.
“Examinations of broker-dealers and RIAs that are using emerging financial technologies or employing new practices, including technological and on-line solutions to meet the demands of compliance and marketing and to service investor accounts.”
Regulatory bodies have struggled to adopt proper advice for crypto projects, partly due to the constantly moving target resulting from the continual innovation in the space. From NFTs to DeFi, proper regulation requires a clearly defined set of data points, use cases, and technology stacks to which rules can be attributed.
One of the significant breakthroughs of the MiCA Act in Europe was the inclusion of a clear set of definitions for blockchain-related terms. However, the U.S. currently has no such definitions leading to frustration within the industry. For example, Nexo, a centralized exchange headquartered in Bulgaria, recently announced that it would cease all U.S. operations due to a lack of the required regulatory oversight.
SEC targets crypto advisers
The SEC statement did, however, clearly identify the areas of crypto asset promotion that would be among its top focuses for 2023. For example, parties that are registered with the SEC to advise on crypto investments will be examined based on their “standards of care” and “risk management practices” alongside other reviews and disclosures.
“Examinations of registrants will focus on the offer, sale, recommendation of, or advice regarding trading in crypto or crypto-related assets and include whether the firm (1) met and followed their respective standards of care when making recommendations… and (2) routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices.”
While not referenced directly in the statement, the SEC appears to be shoring up its position on crypto asset promotion following the fallout of the FTX implosion. Revelations from John Ray III and others involved with the FTX bankruptcy case have identified a lack of procedure within the company.
Poorly reviewed, updated, and managed compliance disclosure and risk management practices were allegedly rife within FTX, aside from any criminal activities by its stakeholders. Further, the “standards of care” given to FTX customers could be scrutinized, given information released since the collapse.
The SEC also disclosed that examinations will occur on an annual basis and “starts with feedback from examination staff who are uniquely positioned to identify the practices, products, services, and other factors that may pose a risk to investors or the financial markets.”
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