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SEC warns that some cryptocurrency exchanges may be operating illegally

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SEC warns that some cryptocurrency exchanges may be operating illegally

Some companies facilitating the trading of digital currencies may be operating illegally, according to a warning from Wall Street's top regulator.

The SEC's Divisions of Enforcement and Trading and Markets issued a statement March 7 that outlined concerns that many online trading platforms were wrongly marketing themselves as "exchanges," indicating to investors that they are regulated or meet the standards of a national securities exchange.

"Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select," the SEC said in a statement. "The so-called standards should not be equated to the listing standards of national securities exchanges."

Cryptocurrency trading venues have become increasingly popular as investors have rushed to try and tap into the recent boom seen in digital currencies like Bitcoin. But the trading venues have largely operated with little regulatory oversight or guidance on their structures.

Throughout SEC Chairman Jay Clayton's first year at the helm, the agency has targeted fraudulent initial coin offerings. Companies have looked to ICOs as a means to raise funds by offering investors a digital currency. Clayton has said in recent months that ICO markets provide little investor protection, and there are increased opportunities for fraud and manipulation.

Now, the SEC is saying that many cryptocurrency trading platforms may fall outside of federal securities laws as they are not registered as national securities exchanges or operate as licensed alternative trading systems.

Industry participants have hinted in recent weeks that U.S. regulators may begin encouraging cryptocurrency exchanges to register under the Exchange Act, or to become licensed alternative trading systems. Richard Johnson, an analyst with Greenwich Associates, has said that cryptocurrency trading venue operators such as Coinbase Inc. may be interested in acquiring Chicago Stock Exchange Inc. in a potential move to become compliant with the Exchange Act.

The SEC said in its statement that it hopes market participants will consult with legal counsel to help them better understand federal securities laws or to contact the SEC's staff.