SEC: SIPA May Not Apply to Crypto Traders

The  (SEC) released a typically monotone statement this Monday in which it outlined some of its views on broker-dealers operating in the cryptocurrency space.
Though it acknowledged that some regulations would be hard to apply to digital assets, the regulator noted that firms should try to adhere to existing regulations governing the securities markets.

The SEC’s statement was particularly focused on the customer protection rule (CPR).
As the regulator so cogently put it, the CPR “requires broker-dealers to safeguard customer assets and to keep customer assets separate from the firm’s assets, thus increasing the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure.”
Regulations don’t apply
In its statement, the regulator noted that some broker-dealers operating in the cryptocurrency markets use a business model that does not require them to follow the CPR.
Effectively, those companies direct buyers to transfer securities directly to sellers. That means they are never in possession of them and, as a result, don’t have to worry about protecting buyers’ funds or securities.
Having said this, the SEC then noted that other aspects of the technology that underpins cryptocurrencies means it is harder for firms to adhere to the CPR.
For example, companies may lose a client’s private key, making transferring funds impossible. They would also have almost no ability to cancel mistaken or fraudulent transactions.
“These risks could cause securities customers to suffer losses, with corresponding liabilities for the broker-dealer, imperilling the firm, its customers, and other creditors,” said the regulator.
Lastly, the SEC noted that broker-dealer clients trading in digital assets may not be protected by regulations that would allow them to be compensated if a firm goes bust.
“In the case of a digital asset security that does not meet the definition of “security” under [], and in the event of the failure of a carrying broker-dealer, SIPA protection likely would not apply and holders of those digital asset securities would have only unsecured general creditor claims against the broker-dealer’s estate