In a recurring advisory published 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 assets.
The warning, echoing previous warnings, highlights the continued speculative and volatile nature of such investments, underscoring the significant risk of loss, especially for individual investors involved in transactions in crypto assets.
Legal compliance
The SEC’s repeated warning draws attention to a number of ongoing concerns, the most important of which is the issue of regulatory compliance.
The SEC notes that many entities offering investments or services in crypto assets continue to operate outside the boundaries of the federal securities laws. This non-compliance can lead to a lack of crucial information needed to make informed investment decisions.
The importance of audited financial statements is another focus of the SEC’s repeated caution. The watchdog points out that offerings of unregistered crypto asset securities often omit these vital documents, which are essential for investors to understand the securities they are considering investing in.
Evidence of reserves
Another concern highlighted by the SEC is the misleading nature of some crypto asset entities’ ‘Proof of Reserves’ claims. While these claims are intended to reassure customers about the safety of their funds, the SEC warns that they are not subject to the rigor of audited financial statements and therefore could mislead investors about the true safety of their assets.
The SEC also reemphasizes the significant investor protection provided by registering with the SEC as a broker-dealer or investment advisor. These protections, which are lacking at many non-compliant crypto asset entities, include strict rules around asset custody and conflict of interest management.
Additionally, the SEC’s warning reiterates the risks associated with crypto asset entities that circumvent standard regulatory safeguards. These risks include potential market manipulation, lack of regulatory oversight and lack of standard custody protections, which puts investors at greater 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 assets sector remains a critical issue.
Unlike traditional financial institutions, crypto asset entities do not offer this type of insurance, leaving investors more vulnerable.
Finally, the SEC continues to warn about the high incidence of fraud and scams in the crypto-asset sector, a concern that remains as relevant today as in previous warnings. The committee advises investors to be wary of fraudulent activities, including Ponzi and pyramid schemes and outright theft, that are rampant in this area.
The SEC’s renewed warning is a stark reminder for investors to exercise extreme caution when dealing with crypto assets. The advisory emphasizes the importance for investors to fully understand the risks, confirm compliance with federal securities laws, and conduct extensive due diligence before investing in these significantly volatile and speculative assets.
