SEC Regulations for Bitcoin Investors

Bitcoin investors

Bitcoin went mainstream as an investment asset class in 2017. In response to this, the U.S. Securities and Exchange Commission (SEC) announced considerations for investors who are looking to enter the digital currency space.

In its announcement titled “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets,” the SEC outlines several key considerations as well as regulatory concerns for bitcoin investors who are using online trading platforms to execute their trades.

The SEC Warns Against Using Unlicensed Bitcoin Exchanges

In its statement, the SEC highlights that several digital asset online trading platforms in the U.S. should be registered and licensed as exchanges because they have the same functionalities and purpose as any other type of securities exchange. However, most U.S.-based digital currency trading platforms are currently not licensed under the federal regulatory framework governing registered national securities exchanges.

Many of these bitcoin exchanges seem like professionally run national exchanges that adhere to regulatory standards. In reality, however, the SEC has little to no insight into the majority of these platforms because they are not licensed by the regulator and have thus not undergone sufficient scrutiny.

The SEC, therefore, urges bitcoin investors to only trade on bitcoin exchanges that are registered with the financial regulator as they offer the level of consumer protection that all investors should be granted.

The SEC’s Recommendations for Choosing a Bitcoin Exchange

Aside from only trading on regulated bitcoin exchanges, the SEC also recommends investors ask themselves a range of questions before signing up and trading on a digital asset exchange.

These questions are:

  • Do you trade securities on this platform?  If so, is the platform registered as a national securities exchange?
  • Does the platform operate as an ATS?  If so, is the ATS registered as a broker-dealer and has it filed a Form ATS with the SEC?
  • Is there information in FINRA’s BrokerCheck ® about any individuals or firms operating the 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?

By answering these questions when researching a digital currency exchange on which you are considering trading, you can easily filter out the more secure and professionally run exchanges from the riskier and insecure trading platforms.

The SEC Cannot Help You If You Trade on Unregulated Exchanges

As a bitcoin investor in the U.S., it is important to know that you have very little consumer protection when it comes to making bitcoin investments on unregulated online trading platforms.

The SEC only has regulatory scrutiny over those exchanges that are within its regulatory scope. Hence, if you are using an overseas online trading platform, for example, and you lose funds due to an operational error on the platform, there is little the SEC can do to help you retrieve your funds.

That is why it is important to choose your bitcoin trading platforms carefully and to always conduct sufficient research on the platform before creating an account.

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