In a year marked by regulatory scrutiny and enforcement actions against the crypto industry, the US Securities and Exchange Commission (SEC) shows no signs of slowing down. 

The SEC’s Division of Examinations recently unveiled its 2024 priorities, signaling a potential tightening of regulations for crypto exchanges, firms, and cryptocurrencies falling under the SEC’s definition of “securities” based on the Howey Test.

According to the Division’s announcement on October 16, the proliferation of crypto assets, associated products and services, and emerging financial technology has caught the SEC’s attention. 

The Division will focus on broker-dealers and advisers offering new products and services, particularly those employing technological and online solutions to meet compliance and marketing demands. 

Automated investment tools, artificial intelligence, trading algorithms or platforms, and the risks posed by emerging technologies and alternative data sources will be scrutinized.

Given the ongoing volatility and activity in the crypto market, the Division will continue to closely monitor and conduct examinations of registrants. These examinations will assess the offer, sale, recommendation, advice, trading, and other activities related to crypto assets or their associated products. 

The Division will review whether registrants meet appropriate standards of conduct when advising customers on crypto assets, particularly about retail-based investors, including older investors and investments involving retirement assets. Compliance practices, risk disclosures, and operational resiliency will also be evaluated.

For crypto assets categorized as funds or securities, the Division will consider whether advisers comply with the custody requirements mandated by the Advisers Act. 

Furthermore, the Division will examine the adequacy of compliance policies and procedures, disclosure accuracy, and security risks associated with using blockchain and distributed ledger technology.

The Division’s focus also extends to anti-money laundering (AML) programs, ensuring that broker-dealers and registered investment companies tailor their AML programs to their business models and associated risks. 

Independent testing, customer identification programs (including beneficial owners of legal entity customers), and compliance with the Office of Foreign Assets Control (OFAC) sanctions will be thoroughly reviewed. 

Ultimately, policies and procedures for overseeing applicable financial intermediaries will also be scrutinized for registered investment companies.

The impact of the actions taken by US regulatory bodies in 2024 on the innovation and growth of the industry remains uncertain. However, given the current crackdown, there is a significant possibility that enforcement actions will continue to escalate throughout the remainder of this year and into 2024 unless there are changes in the leadership of the SEC.

Featured image from Shutterstock, chart from TradingView.com

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