The U.S. Securities and Exchange Commission (SEC) has issued a risk alert to market participants who handle digital assets that qualify as securities. The security regulator has pointed out that these assets present unique challenges and risks which firms must consider when designing their compliance program. The regulator issued the risk alert through its Division of Examinations which is charged with protecting investors and ensuring market integrity.
The SEC has asked market participants to focus on regulatory compliance.
The SEC alert is to assist broker-dealers, investment advisers, and transfer agents to develop and enhance their compliance programs. For investment advisers, the securities regulator advised them to focus on regulatory compliance associated with portfolio management. This will include due diligence on digital assets, evaluation and mitigation of risks related to trading venues, and management of risks stemming from forks and airdrops. They must also focus on custody, including ensuring they have a business continuity plan in cases where employees have exclusive access to private keys.
“Determining the value of digital assets can be challenging.”
The securities regulator also acknowledged that determining the value of digital assets can be challenging. This may be due to market fragmentation, the potential of price manipulation, and high volatility. The regulator’s examination of investment advisers will look into this, examining “the valuation methodologies utilized, including those used to determine principal markets, fair value, valuation after significant events, and recognition of forked and airdropped digital assets.” The risk alert laid out the key areas that broker-dealers must focus on to stay compliant with the regulator when handling cryptocurrencies. It includes safekeeping of funds and operations and registration requirements. Broker-dealers must also focus on anti-money laundering compliance, SEC noted.
