The U.S. Securities and Exchange Commission (SEC) shows no signs of slowing down in a year marked by regulatory scrutiny and enforcement actions against the cryptocurrency industry. Here are the details…
SEC will primarily examine cryptocurrencies
The SEC’s Division of Examinations recently announced its 2024 priorities, signaling a potential tightening of regulations for crypto exchanges, firms, and cryptocurrencies that fall under the SEC’s definition of “securities” based on the Howey Test. According to the department’s announcement, the proliferation of crypto assets, related products and services, and emerging financial technology has attracted the SEC’s attention. The division will focus specifically on broker-dealers and advisors offering new products and services that use technological and online solutions to meet compliance and marketing demands. The risks posed by automated investment tools, artificial intelligence, trading algorithms or platforms, and emerging technologies and alternative data sources will be scrutinized.
Given the ongoing volatility and activity in the crypto market, the Division will continue to closely monitor registrants and conduct investigations. These reviews will evaluate offers, sales, recommendations, recommendations, trading and other activities related to cryptocurrencies or their related products. The Division will review whether registrants meet appropriate standards of conduct when advising clients on crypto assets, particularly for older investors and individual-based investors, including investments involving retirement assets. Compliance practices, risk disclosures and operational flexibility will also be evaluated.
AML compliance is also in focus
For cryptocurrencies classified as funds or securities, the Department will evaluate whether advisors have complied with the custody requirements mandated by the Advisers Act. Additionally, the Division will review the adequacy of compliance policies and procedures, disclosure accuracy, and security risks associated with the use of Blockchain and distributed ledger technology. The division’s focus also extends to anti-money laundering (AML) programs, enabling broker-dealers and registered investment firms to tailor their AML programs to their business models and associated risks.
Independent testing, customer identification programs (including beneficial owners of legal entity customers) and compliance with Office of Foreign Assets Control (OFAC) sanctions will be comprehensively reviewed. Ultimately, policies and procedures for the supervision of relevant financial intermediaries will also come under the spotlight for registered investment companies. The impact of the steps to be taken by US regulatory authorities in 2024 on the innovation and growth of the sector remains unclear. However, given current pressures, there is a significant likelihood that enforcement actions will continue to escalate throughout the remainder of this year and into 2024 unless there are changes in the SEC’s leadership.
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