Volatility aside, fraud remains one of the most significant risks inherent in the nascent cryptocurrency market. From virtual coin trading to initial coin offerings (ICOs), there have been multiple reported cases of outright scams and fraudulent activities. The United States Securities and Exchange Commission (SEC), mindful of the goings-on in the market, has decided to increase its regulatory scrutiny over the actions of operators in the space.
SEC Believes Cryptocurrency Market is Rife with Fraud
According to inside sources at the SEC, the Commission believes that the cryptocurrency market is rife with fraud and misconduct. Thus, the SEC has sent a barrage of queries to crypto brokerage firms in recent weeks. Bloomberg reports that most of these queries have inquired about the business practices of these firms.
Inside sources who spoke to Bloomberg on the condition of anonymity report that the Commission is interested in details such as fees and investment advice. Since no major Wall Street bank deals in cryptocurrency at the moment, the SEC has shone its spotlight on the smaller brokerage firms that participate in the market.
The SEC inquiry is being spearheaded by the Office of Compliance Inspections and Examinations (OCIE). In a report published in February 2018, the OCIE said:
“The cryptocurrency and ICO markets have grown rapidly and present a number of risks for retail investors. Areas of focus will include, among other things, whether financial professionals maintain adequate controls and safeguards to protect these assets from theft or misappropriation.”
This isn’t the first time that the SEC is holding a microscope over the market. Since late 2017, the Commission has taken a more hands-on approach to its oversight activities on the market. Most of the SEC’s focus has been on the ICO market, with some project teams facing indictment.
The SEC review comes at a time when industry self-regulators like the Financial Industry Regulatory Authority (FINRA) and the National Futures Association (NFA) have begun to take a critical look at the dealings of member companies in the cryptocurrency market.
Commenting on the situation, Georgetown University’s executive director for Financial Markets and Policy, John L. Jacobs, said:
“They’re trying to understand the whole ecosystem. They’re still wrestling with how to make sure that this an organized efficient marketplace.”
The OCIE’s investigation is tailored towards protecting investors. While some brokerage firms have been forthcoming about their dealings in the cryptocurrency market, there remains a significant proportion of firms that are yet to open up their activities to regulatory oversight.
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