The incidents of investors being deprived of their safety and their hard-earned money being lost to fraudulent transactions or hacking are increasing these days, and the SEC’s attempts to tighten the regulations to counter such thefts are gaining momentum.
Gurbir S Grewal, director of the Enforcement Department of the US Securities and Exchanges Commission (SEC) stressed the importance of revising and innovating the regulations to uphold the interests of the investors. He was speaking at the symposium hosted by William & Mary Business Law Review on “Regulating Finance in a Changing Administrative State”.
Grewal thinks that the Securities Act of 1933 and the Securities Exchange Act of 1934, which paved the way for the formation of the SEC, should be revised to accommodate cryptocurrencies and its allied digital finance trends.
Are Crypto Investors Largely Harmed?
Every crypto transaction is prone to fraud, and it is especially so in the American market. In America, nearly half of the crypto investors (46%) have incurred a loss due to some fraud attempt or the other, which is an alarming statistic.
Some of the common defaults in the sector are given below.
- To begin with, many coin issuers have failed to register their coins on the initial public offerings or release the necessary disclosures or documents to inform the investors.
- Not all DeFi products or stablecoins are true to the real sense of the word. Some are not decentralized or are unstable compared to the currency they are pegged to.
- There have been instances of smart contracts being used to violate and manipulate the privacy and safety of investors.
- Most cryptocurrency platforms have failed to publicize the cybersecurity risks inherent to their platforms, which fails to keep the investors vigilant.
The existing laws and regulatory measures are incompetent in identifying incompetent crypto service providers who do not have proper registrations with the concerned authorities.
The SEC Enforcement wing’s chief has stressed the need to ascertain the veracity of the crypto transactions using the guidelines put forward by the US Supreme Court in the SEC Vs Howey case to determine what constitutes an investment contract and in turn a security.
Compliance Initiatives in the Crypto Markets
Every investor in the cryptocurrency market is entitled to safe and informed transactions and therefore, they must get the right information in the form of disclosures about the issuer, their financial status, the properties and use cases of their offerings, and the like.
Different entities that govern the securities market such as the brokers, exchanges, and clearing agencies are governed by different rules and regulations. There should be a legal consensus among these entities so that fraud emanating at any stage can be countered by the joint effort of all parties involved.
Strict Rules should be implemented to ensure that the different stakeholders maintain adequate data and records to ease regulatory oversight by the SEC.
Grewal thinks that the increasing number of fraud attempts in the cryptocurrency market is not due to the change in the underlying technology but to inadequate compliance from the concerned parties.
The regulatory measures concerning the sector should be adequately tweaked from time to time to accommodate the changing needs of the sector.
Remedial Measures
Due to the increasing fraud in the cryptocurrency sector, a majority of American crypto investors are losing their trust in the decentralized market and are becoming doubtful about the ability of the enforcement agencies to prosecute the bad actors in the field.
Ethnic minorities of the populations such as Black Americans and Hispanic Americans are losing trust in the financial market as they think that the market trends are less representative of their needs.
To counter these allegations of misrepresentations, the Enforcement wing of the SEC is planning to implement a masterplan based on three major principles:
- Robust enforcement
- Robust remedies
- Robust Compliance
The Bottom Line
When cryptocurrencies were first introduced, they were seen as a remedy to the ill effects and failures of the traditional financial market, but it is alarming to see that investors are losing trust in the decentralized market due to the same regulatory mistakes.
Therefore, stricter means of enforcement are necessary to safeguard the investors’ interests and ensure that no harm occurs to them in return for the trust and courage they place in the emerging decentralized marketplace.
