The SEC Releases Compliance Notice on Future Crypto Regulations

As the traditional financial world begins its mainstream adoption of crypto assets, the process of legitimizing digital assets as financial products pose myriad of risks and regulatory challenges.

Breaking Down the SEC’s Future Crypto Regulations

Today, the U.S. Securities and Exchange Commission (SEC) released an 8-page document that details the framework in which the agency will examine digital asset investments.

Demanding regulatory compliance across areas ranging from custody, bookkeeping, registration requirements to conflicts of interest protocols, the SEC has made it clear to major broker-dealers and investment advisers that digital assets will face similar levels of scrutiny as traditional securities.

For instance, the SEC stated that it “observed inadequate [Anti Money Laundering] procedures, controls, and documentation” due to the decentralized nature of many digital assets.

For advisories registered with the Financial Industry Regulatory Authority (FINRA), they will require stringent Know Your Customer (KYC) procedures in compliance with FINRA Rule 2090. 

Many of the key examinations rehash traditional financial practices and merely reapply them to digital investments. However, new concerns have also emerged due to the fundamental differences between asset classes. Questions such as how much control an investment firm should have over their client’s private keys are one of many novel issues brought up in the compliance notice. 

The timing of the report does not coincide with any recent event. However, the prevalence of social media platforms in the explosive rise of altcoins such as Dogecoin have likely spurred discussions within the SEC on the potential dangers of an unregulated industry.

Nonetheless, officials framed the notice as a reminder of the risks that may be associated with digital assets, and the necessity of compliance frameworks to protect the shared interests of market participants. 

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