SEC Sounds Alarm on Crypto Investments as Tether Faces Regulatory Scrutiny

Investors have been cautioned by the Securities and Exchange Commission (SEC) regarding the risky nature of investing in crypto asset securities. These investments are highly volatile and speculative in nature, coupled with the lack of investor protections on many platforms, which makes them vulnerable to potential loss.

In addition, many crypto asset entities may not be adhering to applicable federal securities laws, further increasing the risk. Furthermore, the SEC has hinted at a possible crackdown on Tether, a popular cryptocurrency.

Risks of Investing in Crypto Asset Securities

Investments in crypto asset securities are exceptionally risky and often volatile. The past year has seen a number of major platforms and crypto assets become insolvent or lose value. 

They include: 

• Volatility and liquidity in crypto-asset markets
• Potential failure or bankruptcy of the company holding your crypto assets
• Loss of legal ownership of your assets, and the possibility that you may not be able to retrieve them when you want to
• Unpredictability, including the disappearance of a market for a particular crypto asset security or the inability to trade the crypto asset security anywhere
• Highly concentrated and opaque ownership and control structures
• Enforcement of laws and regulations by federal, state, or foreign governments that may restrict the use and exchange of crypto assets
• Investors should be aware that these risks may result in significant losses. 

Compliance with Federal Securities Laws

Entities offering crypto asset investments or services may not be complying with applicable federal securities laws. Under these laws, a company may not offer or sell securities unless the offering is registered with the SEC or an exemption to registration is available.

Securities broker-dealers, investment advisors, alternative trading systems, and exchanges must also register with the SEC, a state regulator, or a self-regulatory organization (SRO), such as FINRA. Entities and platforms involved in lending or staking crypto assets may also be subject to federal securities laws.

Importance of Proof of Reserves

Crypto asset entities may use proof of reserves in lieu of audited financial statements to obscure and confuse customers about the safety of their assets. Proof of reserves typically only provides a snapshot of what an entity holds in certain wallets or accounts as of a point in time.

It does not disclose management’s activities during the period between snapshots, including the use of customer crypto assets in asset lending or other activities. It also does not provide customers with the full story about an entity’s liabilities, such as whether the customer has to stand in line behind other creditors if the entity fails.

Proof of reserves is not as rigorous or comprehensive as a financial statement audit and may not provide any level of assurance. Furthermore, there are no specific audit requirements for the engagement or the information reported, allowing an entity full discretion to manage the terms of the engagement. 

Investors in crypto asset securities should understand that they may be deprived of key information and other essential protections in connection with their investment. Exercise caution and do your due diligence before investing in any crypto asset security.