In a year marked by heightened regulatory scrutiny and enforcement actions against the cryptocurrency 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.

Crypto Industry Under the SEC’s Lens:
According to the Division’s announcement on October 16, the rapid growth of crypto assets, associated products, and services, along with the emergence of financial technology, has garnered the SEC’s attention. The Division’s primary focus will be on broker-dealers and advisers offering new products and services, particularly those utilizing technology and online solutions to meet compliance and marketing demands.

Emerging Technologies and Compliance:
The Division of Examinations will closely examine automated investment tools, artificial intelligence, trading algorithms or platforms, and the risks posed by emerging technologies and alternative data sources. With the ongoing volatility and activity in the crypto market, the Division will continue to monitor and conduct examinations of registrants, assessing the offer, sale, recommendation, advice, trading, and other activities related to crypto assets or their associated products.

Enhancing Investor Protection:
A crucial aspect of this examination will be ensuring that registrants meet appropriate standards of conduct when advising customers on crypto assets, with a particular focus on retail-based investors, including older investors and investments involving retirement assets. Compliance practices, risk disclosures, and operational resiliency will also be thoroughly evaluated as part of the Division’s scrutiny.

AML Compliance Measures:
To combat laundering risks associated with crypto assets classified as funds or securities, the Division will assess whether advisers comply with custody requirements mandated by the Advisors Act. Additionally, the adequacy of compliance policies and procedures, accuracy of disclosures, and security risks related to employing blockchain and distributed ledger technology will be examined. The Division will also review brokers-dealers and registered investment companies’ anti-money laundering (AML) programs to ensure they align with their specific business models and associated risks.

Crackdown on Financial Intermediaries:
In its examination, the Division will pay close attention to independent testing, customer identification programs (including beneficial owners of legal entity customers), and compliance with Office of Foreign Assets Control (OFAC) sanctions. These measures aim to enhance the integrity of the industry and prevent illicit activities. Furthermore, policies and procedures for overseeing applicable financial intermediaries of registered investment companies will be scrutinized.

Uncertainty and Enforcement Actions:
The impact of the SEC’s regulatory actions on the innovation and growth of the crypto industry remains uncertain. However, given the current crackdown, there is a significant possibility that enforcement actions will continue to escalate throughout this year and into 2024, unless there are changes in the SEC’s leadership.

Disclaimer: The information provided in this research report is for informational purposes only and should not be interpreted as financial or investment advice. The NFT and cryptocurrency market is highly volatile, and readers should conduct thorough research before making any investment decisions.