Digitisation brings new challenges to the diligence of financial institutions. To identify whether a transaction or investment in legitimate or to comply with KYC and AML rules, the industry and the regulators need to invent new approaches.
Source: John McCrank for Thomson Reuters, NEW YORK, April 3
The U.S. Securities and Exchange Commission on Wednesday issued guidelines to help market participants determine whether a digital asset qualifies as a security under federal securities laws and needs to be registered with the regulator.
The SEC has ramped up enforcement actions related to digital assets and initial coin offerings, which work much like initial public offerings for companies, but instead of selling shares,they raise capital by selling digital tokens or cryptocurrencies.
Federal securities laws require all offers and sales of securities to fall in line with conventional offering rules,such as registering as an IPO, or qualifying for an exemption from registration under the private placement or crowdfunding rules.
To help decide whether a digital asset is a security, the SEC said both it and the federal courts have looked to see whether the asset has any characteristics of an “investment contract.”
An investment contract “exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” the SEC said in a 13-page framework paper laying out some of the factors market participants should consider prior to an ICO.
Whether the digital asset is an investment contract at the time of its offer or sale depends on the specific facts and circumstances, the SEC said.
ICOs exploded in popularity in 2017, raising more than $6 billion, but the prices of most cryptocurrencies have plunged since then and many of the companies and projects associated with ICOs have been abandoned, adding to increased regulatory scrutiny.
ICOs have also attracted fraudsters looking to cash in on the popularity of the offerings, leading the SEC to boost its oversight of the space, Brett Redfearn, the SEC’s head of trading and markets said at a securities industry conference on March 26.
“When you have an unregulated space, bad actors do tend to flock there and so if you look at the amount of enforcement cases that have come and the amount of manipulation and fraud and all of the other things – bad sales practices and the like – that have happened in that space, it’s astronomical,” he said.