SEC issues new investor warning over crypto assets

In a recurring advisory issued today, the U.S. Securities and Exchange Commission (SEC), through its Office of Investor Education and Advocacy, has once again emphasized the significant risks associated with investing in crypto asset securities.

The warning, echoing previous alerts, highlights the ongoing speculative and volatile nature of such investments, underscoring the substantial risk of loss, particularly for individual investors involved in crypto-asset transactions.

Legal compliance

The SEC’s reiterated warning draws attention to several persistent concerns, chief among them is the issue of legal compliance.

The SEC notes that many entities offering crypto asset investments or services continue to operate outside the bounds of federal securities laws. This non-compliance can lead to a lack of critical information necessary for making informed investment decisions.

The importance of audited financial statements is another focal point of the SEC’s repeated caution. The watchdog points out that unregistered crypto asset securities offerings often omit these essential documents, which are vital for investors to understand the securities they consider investing in.

Proof of Reserves

A further concern the SEC highlights is the deceptive nature of “Proof of Reserves” claims made by some crypto asset entities. While these claims are meant to reassure customers about the safety of their funds, the SEC warns that they do not undergo the rigorous scrutiny of audited financial statements and can thus mislead investors about the actual security of their assets.

The SEC also re-emphasizes the significant investor protections afforded by registration with the SEC as a broker-dealer or investment adviser. These protections, absent in many non-compliant crypto asset entities, include rigorous rules around the custody of assets and management of conflicts of interest.

Moreover, the SEC’s warning revisits the risks associated with crypto asset entities that evade standard regulatory safeguards. These risks include potential market manipulation, lack of regulatory oversight, and the absence of standard custodial protections, all of which put investors at heightened risk.

Fraud and scams

According to the regulator, the lack of protections equivalent to those provided by the Securities Investor Protection Corporation (SIPC) and the Federal Deposit Insurance Corporation (FDIC) in the crypto asset sector remains a critical issue.

Unlike traditional financial institutions, crypto asset entities do not offer these types of insurance, leaving investors more vulnerable.

Finally, the SEC continues to caution against the high incidence of fraud and scams in the crypto asset securities sector, a concern that remains as relevant today as in past warnings. The commission advises investors to be wary of fraudulent activities, including Ponzi and pyramid schemes and outright theft, which are rampant in this area.

The SEC’s renewed warning is a stark reminder for investors to exercise extreme caution when dealing with crypto asset securities. The advisory emphasizes the importance for investors to completely understand the risks, confirm compliance with federal securities laws, and carry out comprehensive due diligence before investing in these significantly volatile and speculative assets.

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