SEC commissioner decries poor guidance, enforcement in crypto space

The ongoing struggle to introduce regulatory oversight of crypto trading has intensified due to a controversial enforcement action from the U.S. Securities and Exchange Commission (SEC) against the former operator of popular crypto platform Poloniex.

Without admitting or denying the SEC’s findings, Poloniex LLC agreed in a settlement to pay more than US$10 million — including US$8.5 million in disgorgement, a US$1.5-million penalty and more than US$400,000 in interest. The measures were set to settle allegations that the platform violated U.S. securities laws by operating an unregistered digital asset exchange between 2017 and 2019 when the firm exited the U.S. market.

According to the SEC’s order, the firm’s platform facilitated the trading of digital assets that meet the definition of securities. As a result, the trading platform functioned as an exchange under U.S. securities law without being registered.

“Poloniex attempted to circumvent the SEC’s regulatory regime, which applies to any marketplace for bringing together buyers and sellers of securities regardless of the applied technology,” said Kristina Littman, chief of the SEC enforcement division’s cyber unit, in a release accompanying the settlement.

The enforcement action was criticized by SEC commissioner Hester Peirce.

In a dissenting statement, Peirce said that at the time that Poloniex was operating its platform, regulators hadn’t yet devised an approach to regulating crypto trading. “Sure, Poloniex could have tried to register as a securities exchange,” she said. But it “likely would have waited…and waited…and waited some more.”

Peirce noted that the SEC and other regulators have taken only halting steps to enable regulated firms to deal in crypto, as the emerging digital asset sector poses novel regulatory and compliance issues.

“Given how slow we have been in determining how regulated entities can interact with crypto, market participants may understandably be surprised to see us to come onto the scene now with our enforcement guns blazing and argue that Poloniex was not registered or operating under an exemption as it should have been,” she said.

Peirce called on the SEC to answer a host of questions posed by the prospect of crypto trading platforms seeking registration as regulated exchanges or alternative trading systems (ATSs).

“I hope we address these and other issues raised by entities that want to participate in this area expeditiously and in a way that acknowledges the need to come up with sensible solutions,” she said.

In Canada, regulators are engaged in their own efforts to bring crypto trading under regulatory oversight: earlier this year, the Ontario Securities Commission (OSC) warned firms in the sector to seek registration or face enforcement action.

In May, the OSC brought allegations against the current operator of the Poloniex platform, Seychelles-based Polo Digital Assets, Ltd., for allegedly operating an unregistered crypto asset trading platform in Canada. In late 2019, Poloniex was spun out of U.S. fintech firm Circle Internet Financial Ltd. to form Polo Digital.

The OSC’s allegations against Polo Digital have not been proven. A hearing in that case is scheduled for Oct. 15.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.