Brokers’ Cryptocurrency Deals Are Focus of SEC Review

(Bloomberg) -- Wall Street’s main regulator is boosting its scrutiny of brokerages that deal in cryptocurrencies, according to two people familiar with the matter, the latest sign that authorities want to know more about a burgeoning market that they fear might be full of misconduct.

Brokerages have been peppered in recent weeks with questions from Securities and Exchange Commission examiners about their business practices and how they deal with clients, according to one of the people, who requested anonymity to discuss the review. Among other things, the SEC is seeking specific information about fees generated from trading, financing and initial coin offerings. The agency is also gathering data on investment advisers’ involvement, another person said.

Cryptocurrencies have gotten increasing attention in the past year from regulators including SEC Chairman Jay Clayton, who has said he believes the ICO market is rife with fraud. The agency’s enforcement unit has sued firms that it says violated securities laws through coin offerings, and Bloomberg News has reported that Justice Department lawyers have opened a criminal probe into whether traders are manipulating the price of Bitcoin and other digital currencies.

It’s predominantly smaller brokerage firms that deal with virtual tokens. No Wall Street banks currently trade cryptocurrencies.


The SEC review, being led by the Office of Compliance Inspections and Examinations, follows requests seeking information from hedge funds about how they price digital investments. It comes as industry self-regulators like the Financial Industry Regulatory Authority and the National Futures Association question member companies about their dealings in cryptocurrencies.

“They’re trying to understand the whole ecosystem,” John L. Jacobs, executive director of Georgetown University’s Center for Financial Markets and Policy, said of regulators’ inquiries. “They’re still wrestling with how to make sure that this an organized efficient marketplace.”

Natalie Strom, a spokeswoman for Clayton, declined to comment.

OCIE’s primary function is conducting examinations with the goal of protecting investors and ensuring market integrity. When the unit’s inspectors spot signs of misconduct, they typically refer findings to the SEC’s enforcement division for further scrutiny that can lead to formal investigations, fines and other penalties when wrongdoing is found.