SEC issues strident warning over cryptocurrency risks

In a significant ramping up of regulatory concern, the US Securities and Exchange Commission (SEC) has warned that investors in the volatile cryptocurrency sector face potentially significant losses.

In a wide-ranging and forthright investor bulletin, the SEC’s Office of Investor Education and Advocacy said it continues to urge investors to be cautious if considering an investment involving crypto asset securities:

“Investments in crypto asset securities can be exceptionally volatile and speculative, and the platforms where investors buy, sell, borrow, or lend these securities may lack important protections for investors.  The risk of loss for individual investors who participate in transactions involving crypto assets, including crypto asset securities, remains significant.  The only money you should put at risk with any speculative investment is money you can afford to lose entirely.”

The SEC added that investors should understand that firms offering crypto asset securities may not be complying with US laws. Unregistered offerings of such securities may not provide important data, including audited financial statements, for informed decision making, the regulator said.

The notice also cautioned that “fraudsters continue to exploit the rising popularity of crypto assets to lure retail investors into scams, often leading to devastating losses. Crypto asset securities-related investments continue to be replete with fraud, including bogus coin offerings, Ponzi and pyramid schemes, and outright theft where the project promoter simply disappears with investors’ money”

“Some promoters use social media to find and entice new investors with testimonials about returns made on deposits and investments, but what is not mentioned is that the promoter is often paying investor withdrawals out of new investor funds – a Ponzi scheme. Moreover, recovering money from the wrongdoers can be nearly impossible.  In part, that can be because of the anonymity or pseudonymity associated with crypto assets.  However, the SEC and state regulators continue to bring enforcement actions in this space.”

The bulletin from the SEC follows a turbulent period for the cryptocurrency market as bitcoin, ethereum, and other crypto tokens have seen their value fall as the US Federal Reserve has increased interest rates.

The notice follows the announcement last week from crypto exchange Coinbase that it had received a Wells notice, which is a formal declaration that SEC staff intend to recommend an enforcement action.