
Statement on Potentially Unlawful Online Platforms for Trading Digital Assets - matthewbauer
https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading
======
Animats
This is going to put a dent into the classic Bitcoin exchange business models
of "claim we were hacked", "front run the customers", and "speculate with the
funds on deposit".

~~~
drcode
Yup, we'll probably be stuck with only 2-4 exchanges that are able to afford
the regulatory burden and then the regulators will claim a victory for
"helping the little guy."

~~~
lambda
As a "little guy" who lost a lot of USD and Bitcoin in the MtGox fiasco
(luckily, nothing I couldn't afford to lose, though with the price BTC is
trading at now it would be really nice to still have those BTC), and any
possible partial payout through the bankruptcy process is tied up in potential
litigation, I'm a fan of more heavily regulated exchanges that I can actually
trust.

Since the MtGox fiasco, I've never bothered trying to liquidate any more of my
Bitcoin, and instead just occasionally use it to pay for things which accept
direct Bitcoin payment.

I'd be a lot happier with a trustworthy, audited exchange.

If there are smaller exchanges that couldn't deal with the regulation, they
probably also can't deal with security, keeping enough secure reserves to be
able to pay out in the case of losses, auditing both their security and
finances to ensure that they stay healthy and liquidate gracefully if they
ever run into financial trouble.

------
TallGuyShort
So if some anonymous person invents cryptocurrencies, at what point are you
supposed to be considered securities? If the first exchange had gone to SEC to
register as a securities exchange, would the SEC not have laughed in their
face? The headline itself really captures the ambiguity and uncertainty of all
of this: "potentially unlawful".

~~~
gwbas1c
The reason why many cryptocurrencies are considered securities is because
there's a certain group of people promoting them as in investment. They are
claiming that their cryptocurrencies will rise in value.

If you study the definition of money, and what makes a good currency, there's
no kind of money that rises in value merely because you own it. Money is meant
to be spent or invested, not hoarded. (Adam Smith's "Wealth of Nations" gives
a much better explanation in the first few chapters than I can.)

So, the point that you have to register as a security is the point that you
start convincing people to own your cryptocurrency as in investment. At that
point, your cryptocurrency isn't money; because money is meant to be spent.

How do you keep the SEC out of your cryptocurrency? Invent a cryptocurrency
that functions as money. You will need to figure out how to keep the value
stable on a day-to-day and year-to-year basis. That means that the supply
needs to expand and contract quickly based on demand. "Mining" based
cryptocurrencies can not do this.

~~~
WikipediasBad
Very interesting idea. Have you heard about Basecoin and Seigniorage shares?
They are trying to do exactly that:
[http://www.getbasecoin.com/](http://www.getbasecoin.com/) Are these coins
securities in your opinion?

~~~
nosuchthing
Stablecoins are effectively digital money laundering tools.

See:
[https://en.wikipedia.org/wiki/Liberty_Reserve#Criminal_inves...](https://en.wikipedia.org/wiki/Liberty_Reserve#Criminal_investigation_and_charges)

Why bother using a convoluted blockchain stablecoin rube goldberg machine
where you need to jump though several hoops just to use it, when you could use
a service like venmo, square, stripe, etc? What use case would justify the
need for a stable coin if not for evading the law?

~~~
pcr0
Cross-border payments is one. BTC was a cheaper and more convenient
alternative to Western Union before the tx fees skyrocketed.

~~~
yownie
and still is now that the fees are low again and spam attacks pushed off

------
cal5k
I'm flabbergasted by how much disinformation is infecting this threat. If you
look at the list of legal actions the SEC has pursued at the bottom of the
article, they are all flagrant violations of securities law and clearly
unethical practices.

For example, in "SEC v. Jon E. Montroll and Bitfunder", the individual in
question was accepting "investments" in his exchange that were clearly
securities (probably fitting the definition of a public offering). He also
failed to report a massive theft of Bitcoin and misappropriated customer
funds.

This guidance does not claim that Bitcoin or Ethereum are securities.

This is the birth of a new industry. It's unregulated, messy, and the massive
amounts of money involved have invited all manner of fraudsters and scam
artists - just like the stock market did 100 years ago. There will be a
regulatory shakeout and we can all hopefully get back to the business of
building a useful ecosystem.

~~~
tptacek
This comment is written as if it says something important, but really doesn't
say anything at all.

It would be monumentally newsworthy if there was clear guidance that Bitcoin
and Ethereum "weren't securities" (more generally: that businesses that simply
deal in Bitcoin were generally outside the purview of securities regulation).
But we do not in fact know that right now.

No expert believes that you can look at the list of current enforcement
actions and reliably predict the SEC's next actions. They could keep taking
out scammers for the next several years, getting practice by picking out the
low-hanging fruit. Or, they could _at literally any moment_ come down like a
ton of bricks on the industry's most mainstream participants. We simply don't
know.

What we do know is that "coin-mediated" finance is enabling thousands of
people to launch investment-driven businesses who would previously not have
been able to do that before, not because of a lack of technical ability but
because the laws made it prohibitively expensive. _Those laws have not been
repealed_. A lot of reasonable people are waiting for the other shoe to drop.

~~~
cal5k
I'm personally very keen on "coin-mediated" finance. However, that doesn't
mean I'm stupid enough to believe I can flout securities law without
consequences. A public offering is still a public offering when you couch it
behind a token, no matter how cleverly constructed your whitepaper.

If the SEC was going to come down like a ton of bricks they would have done so
already. I could be wrong, but their actions seem to demonstrate that they're
taking a very measured, careful approach to coming up with a regulatory
framework.

My comment was a reaction to other comments, not the statement from the SEC -
which actually doesn't say much either.

~~~
tptacek
I think reasonable people can disagree about the likelihood of upcoming
enforcement actions. The only place where I feel entitled to get shouty about
things is when people suggest that it's clear what the SEC is going to do
next. I think it's easy to make a case that it's anything but clear.

I definitely wouldn't feel comfortable proclaiming with any certainty that
Bitcoin or Ethereum or even ICOs were definitely _going_ to fall afoul of the
SEC. My understand is that the SEC is generally a lot smaller than "we" think
it is and it's sort of a random function. Cryptocurrency is super important to
HN, but the SEC's definition of "systemically important" is different than
ours.

~~~
AlexCoventry
> My understand is that the SEC is generally a lot smaller than "we" think it
> is and it's sort of a random function. Cryptocurrency is super important to
> HN, but the SEC's definition of "systemically important" is different than
> ours.

Their mandate is to protect unsophisticated investors. That's why they weren't
particularly interested in Madoff, and why the rules are so much laxer if you
target "accredited investors."

Given that mandate, I think it's highly unlikely that they're going to go
after romping, runaway successes. They'll focus on blatant pig-in-a-pokes.

------
bhouston
It looks like they are going after the exchanges, see this choice quote:

> A platform that trades securities and operates as an "exchange," as defined
> by the federal securities laws, must register as a national securities
> exchange or operate under an exemption from registration, such as the
> exemption provided for ATSs under SEC Regulation ATS.

And it says that online wallets may qualify if they facilitate trading:

> Some online trading platforms may not meet the definition of an exchange
> under the federal securities laws, but directly or indirectly offer trading
> or other services related to digital assets that are securities. For
> example, some platforms offer digital wallet services (to hold or store
> digital assets) or transact in digital assets that are securities. These and
> other services offered by platforms may trigger other registration
> requirements under the federal securities laws, including broker-dealer,
> transfer agent, or clearing agency registration, among other things. In
> addition, a platform that offers digital assets that are securities may be
> participating in the unregistered offer and sale of securities if those
> securities are not registered or exempt from registration.

~~~
ricardobeat
This will not scale, being that many of the modern cryptocurrencies make it
really easy to implement token exchange mechanisms. Fully de-centralized
exchanges are coming too, how are they ever going to regulate that?

~~~
sanderjd
Possibly like pretty much everything else: by writing or clarifying
regulations that make such things a violation and then painstakingly going
after the most extreme violators and punishing them severely enough that it
changes the risk calculation for everyone. Very few things (I can't think of
an example) are regulated to the point of impossibility, they are just
regulated to the point of implausibility.

------
Osiris
I didn't see any cryptocurrency exchanges in their list of approved exchanges.
How does one find out whether a cryptocurrency exchange is registered properly
with the SEC?

~~~
projmayhem
It's very simple. The SEC will prosecute one of the big boy "exchanges" and
bring that company to a screeching halt. All of the rest will have to meet
stringent regulatory requirements in order to service American customers.

~~~
lagadu
This only works for US-based exchanges though.

~~~
pjc50
Tell that to the poker companies.
[https://en.wikipedia.org/wiki/United_States_v._Scheinberg](https://en.wikipedia.org/wiki/United_States_v._Scheinberg)

------
moonka
Does this mean that Coinbase isn't registered but should be? Wonder how this
will play out.

~~~
nokcha
Coinbase has been extremely conservative in which digital assets it supports
(viz., only Bitcoin, Litecoin, Ethereum, and Bitcoin Cash). None of these are
securities.

~~~
awt
Eth used an ICO.

~~~
bpicolo
Still not a security as it's not intended as stake in a business

~~~
DINKDINK
When Ethereum ICO'ed it definitely met the Howey test for securities criteria.
The SEC even stated that.

~~~
aml183
Where did it say that?

------
whb07
From my untrained perspective it seems like they are warning against "the
appearance of a regulated market". Therefore, all these markets should do is
have a big banner at the top stating:

"We are not regulated by the SEC and any activity here is not protected by any
rules and regulations which might apply to a SEC registered company. Please be
careful"

Or am i crazy?

~~~
dragonwriter
They explicitly note that the law requires anything that is an exchange for
trading things that meet the legal definition of a security must either (1)
meet the requirements for and register as a national securities exchange or,
(2) qualify for and secure an exemption under one of the existing legal
exemptions from the registration requirement.

They note that they are particularly concerned about customers mistaking
something for having the features of a regulated exchange when it does not,
but the legal risk and basis for enforcement is not limited to that kind of
confusion. So, no, simply announcing that you are an exchange which doesn't
comply with the registration requirements won't help, and might hurt.

~~~
qbrass
(3) operate outside of the US.

~~~
WJW
(3a) Not allowing US customers (3b) Hopefully in a country that does not have
any extradition treaties with the US.

------
LAMike
What will the SEC do when 0x decentralized exchanges pop up?

There are already a dozen in development... pure p2p trading from a hardware
wallet...

[https://0xproject.com/](https://0xproject.com/)

~~~
jeffreyrogers
You have to convert USD to some cryptocurrency at some point, and vice-versa,
so that's what they'll regulate.

~~~
cal5k
Yup. It's really quite simple - focus on the USD on-ramps and off-ramps.

~~~
lagadu
It's effectively the only way to do it but the way around it is fairly simple:
use a bank account on another country, one that is OK with crypto along with
non-US based exchanges.

~~~
JumpCrisscross
> _the way around it is fairly simple: use a bank account on another country_

Willful money laundering isn't a "simple" risk-reward decision.

~~~
lagadu
I wasn't describing that with the intent of laundering money, I mean simply
having money in a different jurisdiction and using it locally. I can use my
cards from different countries (I've lived in a bunch of different places)
pretty much anywhere around the world, the money I have there in those
currencies is subject first and foremost to local laws.

------
apo
There doesn't appear to be any new information here, and this quote sums it up
pretty well:

 _The SEC staff has concerns that many online trading platforms appear to
investors as SEC-registered and regulated marketplaces when they are not._

The SEC has already made its view clear that many ICOs fall under SEC
regulatory jurisdiction. For example:

[https://www.sec.gov/news/testimony/testimony-virtual-
currenc...](https://www.sec.gov/news/testimony/testimony-virtual-currencies-
oversight-role-us-securities-and-exchange-commission)

~~~
AlexCoventry
You could argue that there was no new information in the DAO guidance, too,
but it did sharpen the public perception of the SEC's position. I think this
warning is doing the same.

Also, ICOs and exchanges are different beasts, both subject to SEC
jurisdiction. This is about regulation of and enforcement against exchanges,
not ICOs.

------
vanattab
Can anyone tell me if Valve's Steam Marketplace would constitute a
"securities" platform. What is the diffrence between Valve facilitating the
buying/selling some ingame currency for arbitrary amounts of real dollars
between users and facilitating the buying/selling of a cryptocurrency?

~~~
pembrook
No. The difference here is 99% of people holding crypto assets are doing so as
(and literally calling them “Investments”). People putting money into steam
are knowingly doing so for the purpose of playing games.

The former represents a significant threat to the stability of American
households when a large portion of the population thinks they are “investing”
in something that is also not required to follow the safeguards in place for
investments. In case you didn’t realize it, there are many many people putting
much more money into crypto than they can afford to lose. See credit card
purchases on Coinbase for more info.

I’d just assume let stupid people be stupid people, however, when millions of
those stupid people collectively lose their money together...it creates huge
societal problems and strain on government services which you and I have to
pay for...with _US dollars_ of course.

------
flowctrl
A lot of people on this thread are conflating Bitcoin and other
cryptocurrencies for what the SEC is talking about in this statement: tokens
that are acting as securities. They do not mean Bitcoin and similar tokens
(ETH, LTC, ADA, NEO, etc). If you've been following the SEC's other
statements, testimonies, and senate committee hearings, you would know that
they do not have a problem with digital currencies per se. That is outside of
their mandate (those fall under the CFTC's purview). What the SEC is concerned
with is _companies_ that issue digital tokens which act as securities. That is
to say, the reason people buy the tokens is the expectation that the work of
the company that issued the tokens will cause the value of the tokens to
increase, and that is the motivation for people to buy them.

This differs from Bitcoin, which is not issued by any company and has no
central organization that does any work or promotion of the token.

The response from American cryptocurrency exchange Bitfinex expresses the
distinction between securities and other types of tokens:

“As a U.S.-based digital currency exchange, Bittrex is committed to incubating
new blockchain technology projects and offering innovative, compliant digital
tokens to our customers. Bittrex uses a robust digital token review process to
ensure the tokens listed on the exchange are compliant with U.S. law and are
not considered securities. Bittrex is committed to helping advance the United
States’ global leadership in this emerging industry, and we look forward to
continuing our proactive dialogue with the SEC and other regulators on how to
build a secure, fully-regulated environment for blockchain that encourages
innovation and economic growth.”

[https://support.bittrex.com/hc/en-
us/articles/360001525152-B...](https://support.bittrex.com/hc/en-
us/articles/360001525152-Bittrex-statement-on-the-SEC-s-online-trading-
platforms-announcement-)

They seem to be prepared to meet the SEC in court to argue that the assets
they facilitate trading for are not securities.

------
LukaGubo
Regulated exchanges have in place a lot of measures to ensure transparency and
protection of traders/investors including survailance systems which closely
look at potential market manipulation. Currently no crypto exchange has such
systems in place - even their matching engines are in question, as mentioned
by the SEC.

Given the amount of money that is traded every day at crypto exchanges the
statement from SEC was expected, but they seem to think that the crypto
markets are too important (too large) to go the Chinese way - to shut down
crypto exchanges that do not comply with basic rules that all exchanges should
follow. But maybe this is just a warning and they will do it later, who
knows...

------
ilkan
Please consider your words.. I see many posts using "money" interchangeably
with "investment"; and misunderstanding the financial definition of "exchange"
(eg trying to argue eBay is the same as Coinbase). Maybe that's the
disconnect, the word doesn't mean what you think it means.

Like using webapp, app and program interchangeably "well they all run on
computers right?"

------
thejerz
There's a lot of misinformation here about US-based laws. Here are the facts:

1\. All US based exchanges require FinCen registration

2\. Most states require a money transmission license

Before choosing an exchange, ask to see their FinCen and state licenses.
Coinbase's licenses, for example, are posted publicly:

[https://www.coinbase.com/legal/licenses](https://www.coinbase.com/legal/licenses)

------
philfrasty
nice instant BTC drop from $10700 to $9400 following this news...

~~~
g09980
May be more likely due to the Binance "hack."
[http://markets.businessinsider.com/currencies/news/bitcoin-p...](http://markets.businessinsider.com/currencies/news/bitcoin-
price-is-plummeting-as-rumors-of-a-binance-hack-swirl-2018-3-1018289038)

Edited for clarity.

~~~
chisleu
We don't know Binance was hacked. Relatively few people use API keys to trade
and every reported account had API keys on it. It's likely some malware that
looks for API keys in config / python files laying around.

~~~
ceejayoz
Perhaps. A SQL injection hole could potentially expose API keys, or there
could be a vulnerability that lets an attacker _add_ an API key.

------
crb002
Come to Iowa. Our State legislature made a haven for exchanges that is
virtually immune from fraud.

[https://twitter.com/leerood/status/971445822524190729](https://twitter.com/leerood/status/971445822524190729)

------
kernelPan1c
Everyone knows that orders are executed fairly on SEC regulated exchanges,
right? Ehhh, not really.

It's important to look back on Flash Boys and recognize the reality of
regulated exchanges. Ultimately consumer demands will drive the ethical
operation of any exchange.

------
83457
Does this apply to digital game item trading/markets at all?

------
oculusthrift
makes me think about the circle and poloniex deal that just happened. Polo
seems very unlawful to me considering all the shitcoins that are listed.

~~~
xwvvvvwx
Polo / Circle discussed with the SEC before the purchase. SEC provided an
exemption from prosecution provided Polo registered as a fully licensed
exchange.

[https://twitter.com/nathanielpopper/status/96820257071911731...](https://twitter.com/nathanielpopper/status/968202570719117313)

~~~
spiralx
Is there any actual evidence for this claim though?

~~~
xwvvvvwx
I don't know more than that tweet, but I would say Nathaniel Popper is a
reasonably reliable source.

------
tmaly
I wonder how they will claim jurisdiction. If it is a foreign ( non US )
located platform, this will be harder to enforce.

------
machinecontrol
Is this the beginning of exchanges getting shutdown?

Does anyone have a list of exchanges that are registered?

------
ilaksh
LOL. I feel like they should be able to distinguish between ICOs and
exchanges.

------
7ero
The whole regulatory framework behind cryptocurrency is a mess. IRS classifies
cryptocurrencies as a property, while SEC classifies some as a security. Which
only makes it harder to regulate. Problems like these need to be solve in
order to help the ecosystem mature in a sustainable way.

------
bluetwo
"I'm not going to live by their rules anymore."

\-- Phil Connors, Groundhog Day

------
AbenezerMamo
This won't age well with the rise of decentralized exchanges like 0x

~~~
WJW
Unless the decentralized exchanges get a licence, they'll still be illegal,
right?

I could imagine jail time for the developers for knowingly supporting illegal
activity would seriously dampen enthusiasm from the open source community.
Also, depending on how decentralized such an exchange is, this would expose
its customers to the same type of consequences (or possibly "just" large
fines). It would not be too difficult to pass a law prohibiting consumers to
knowingly trade on non-registered exchanges I'd think. (Possibly this is
already illegal in your particular jurisdiction, IANAL)

~~~
CryptoPunk
I've never heard of anyone being prosecuted for writing open source code.

It would be a direct affront to the First Amendment, and it would be
remarkable if the US government ever did this to anyone residing in the US,
let alone someone residing in other countries where different laws apply.

I could maybe see the Chinese government taking such action, but it has much
less influence globally than the US, and a relatively small portion of open
source contributors reside in Mainland China.

>>It would not be too difficult to pass a law prohibiting consumers to
knowingly trade on non-registered exchanges I'd think.

Such a law would be widely ignored. Just look at illegal filesharing.

Ultimately digital currency will force the US to decide whether it's a free
society, or whether it mandates that people transact through centralized
gatekeepers. Hopefully it will choose the former.

------
crypt1d
even if SEC comes raining down hell on exchanges, it will not bring any value
on the long term. Decentralized exchanges are popping up like flies, each new
one being more close to the "fully decentralized" concept (see idex,
etherdelta, radarrelay, anything 0x related, etc).

It is very clear to me that SEC has no idea how any of this works under the
hood and does not understand in which way the crypto ecosystem is headed. I
feel like they ought to work more tightly with the industry's thinkers in
order to create some more meaningful guidelines.

------
ilusion
bitcoin just needs to achieve a closed loop economy, and this won't sound as
bad

------
nikolay
Finally, a sense of reason. These scams should be put to an end! Regulation is
an invention of progress, not the opposite!

------
divbit
Thank you

~~~
divbit
(life insurance good to go)

------
jerkstate
sweet, I was looking for a good entry point. Thanks, SEC!

~~~
free2rhyme214
Smart

------
not_that_noob
This is a press release - nothing more. A CYA from the SEC in case something
blows up tomorrow. It's not a cease and desist letter to the exchange
operators - so on balance, this is good news for them. I think the SEC is not
confident that the courts will support their position, and so the next best
option is.... a press release.

~~~
smacktoward
That's not how any of this works.

What you're looking at is not a press release, it is what's called
"administrative guidance"
([https://en.wikipedia.org/wiki/Administrative_guidance](https://en.wikipedia.org/wiki/Administrative_guidance))
-- a regulatory agency laying out its interpretation of how existing laws and
regulations apply to a given situation. Regulators do this to remove
ambiguity, so regulated parties know what the agency expects them to do in
order to stay on the right side of the law.

In this specific case, the SEC is advising crypto-based operations calling
themselves "exchanges" that this is a word that has a special legal meaning,
and that therefore if they want to _continue_ calling themselves "exchanges"
they either need to comply with the same licensing requirements that apply to
other "national securities exchanges," or demonstrate a good reason why those
requirements don't apply to them. (And not just to crypto in general, to their
specific operation in particular.)

The reason this matters is because, now that the SEC has officially gone on
the record with this statement, crypto exchanges can't say they weren't warned
if they continue using the term and the SEC comes after them later. This
statement is their warning that they need to either get licensed or stop
calling themselves exchanges. If they choose to do nothing and just keep on
calling themselves exchanges, and the SEC takes them to court over it, they
won't be able to argue that they didn't know what they were required to do to
use that term. The SEC has just told them what they need to do. The ambiguity
has been removed.

~~~
shkkmo
> In this specific case, the SEC is advising crypto-based operations calling
> themselves "exchanges" that this is a word that has a special legal meaning,

Really? I didn't get that reading at all. The discussion of the use of the
word "exchange" is under the guidance for investors, not the guidance for
trading platforms.

The guidance for trading platforms specifically talks about which assets are
being traded and how determining what type of registration is required
(national security exchange, ATS, broker-dealer, transfer agent, etc...)

"A number of these platforms provide a mechanism for trading assets that meet
the definition of a "security" under the federal securities laws. If a
platform offers trading of digital assets that are securities and operates as
an "exchange," as defined by the federal securities laws, then the platform
must register with the SEC as a national securities exchange or be exempt from
registration. "

~~~
smacktoward
It's possible I'm misreading the specific requirements -- I am not a
securities lawyer, my HN comments are not legal advice, etc. If you are
operating one of these platforms, the issuance of this document is a good
reason to have a chat with a qualified attorney to figure out exactly how it
affects your business.

But that just underlines my main point, which was that this document is a lot
more than just a press release.

~~~
shkkmo
I definitely agree with your main point, (and I am also not a lawyer)

~~~
paulie_a
Off topic but can we drop the "I am not a lawyer" thing in forums?

It is not necessary. Do you really think your random internet comment will be
considered legal advice?

