After the collapse of the cryptocurrency exchange FTX in 2022, many investors came to realize that there was little or no recourse for their losses. Although you can lose money in any type of investment, there are still significant investor protections available in the traditional securities market that are not currently available with most crypto assets.
Those protections come from federal and state securities laws, which are vigorously enforced in the traditional securities market. Until FTX’s collapse, however, it wasn’t clear that the SEC would seek to enforce securities rules on crypto assets – or if crypto assets were securities at all.
It is clear now. Crypto asset trading platforms may claim that they are not selling securities, but the SEC says they are.
“Crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity,” said SEC Chair Gary Gensler recently as the agency charged the crypto asset trading platform Bitrex, Inc. with “operating an unregistered securities exchange, broker and clearing agency.”
The SEC’s Office of Investor Education and Advocacy recently issued guidance urging investors to use caution before investing in crypto assets. For one thing, the fact that the SEC believes these exchanges are unregistered securities exchanges means that investors are taking their chances with services that are not complying with the law.
For another, securities laws offer significant investor protections.
What investor protections are there in securities laws?
There are three main ones. First is transparency – securities laws require those who sell securities to disclose their full financial information. By law, these financial statements must be accurate and complete. There is no guarantee that a crypto asset company will accurately and honestly disclose its financial information.
The second is auditing. Securities regulators don’t have to rely on companies’ honesty; they rely on the audits. Securities law requires these. Unregistered crypto asset entities are not being audited.
Between the legal requirements of accurate financial statements and auditing, securities laws ensure that investors have the information they need to make rational choices about whether to invest.
Registration with the SEC, state regulators and applicable self-regulatory organizations such as FINRA provides the third main protection – recourse in disputes.
Brokers and investment advisors are subject to a mandatory dispute resolution process through FINRA. Most crypto asset entities are not subject to any mandatory dispute resolution process because they are not registered.
All investments carry risk, but some are significantly riskier than others. Lack of regulation has, in the case of FTX, led to many people losing their investments and potentially having no recourse at all.
That said, don’t assume you have no recourse. Check with an attorney who represents investors.
