SEC includes digital assets among examination priorities for 2019

Maria Nikolova

For firms actively engaged in the digital asset market, SEC will conduct examinations focused on portfolio management of digital assets, trading and safety of client funds.

The Office of Compliance Inspections and Examinations (OCIE) of the United States Securities and Exchange Commission (SEC) has announced its 2019 examination priorities, with the list including areas like cybersecurity, anti-money laundering, and digital assets.

The market for digital assets (cryptocurrencies, coins, and tokens) has grown rapidly and may present risks to retail investors, OCIE warns. The number of digital asset market participants, including broker-dealers, trading platforms, and investment advisers, also continues to increase.

Due to the significant growth and risks presented in this market, OCIE will continue to monitor the offer and sale, trading, and management of digital assets, and where the products are securities, examine for regulatory compliance. More specifically, through high level inquiries, OCIE will take steps to identify market participants offering, selling, trading, and managing these products or considering or actively seeking to offer these products and then assess the extent of their activities.

For firms actively engaged in the digital asset market, OCIE will conduct examinations focused on, among other things, portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.

The focus on digital assets is in line with the SEC Enforcement Division Annual Report for Fiscal Year 2018, which notes the prevalence of crypto-asset offerings, including ICOs, has exploded, and that some of the offerings are simply outright frauds misrepresented as emerging technology.

The Division has used public statements to send messages to the ICO and digital asset marketplaces on issues such as the potentially unlawful promotion of ICOs by celebrities and others, and the risks associated with online trading platforms for digital assets.

When warranted, the Division has recommended enforcement actions to the SEC in matters involving ICOs. As of the close of FY 2018, the SEC had brought over a dozen stand alone enforcement actions involving digital assets and ICOs. FinanceFeeds has provided detailed coverage of a number of these actions, including the emergency action the SEC took against PlexCorps and its founders in December 2017, as well as the action against BitFunder and Jon Montroll.

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