The US Securities and Exchange Commission (SEC) on March 23 issued a notice highlighting several reasons investors should be wary of investing in crypto assets securities.

“Investments in crypto asset securities can be exceptionally volatile and speculative, and the platforms where investors buy, sell, borrow, or lend these securities may lack important protections for investors.”

The SEC said firms offering crypto investments services might violate several applicable laws, including the federal securities laws. The regulator added that the law requires anyone offering securities to register with the Commission to enable proper regulation and oversight of the industry.

The bulletin mentioned that crypto exchanges’ proof of reserves is not a standard audited financial statement. According to the regulator, investors should exercise extreme caution when relying on such statements to make decisions.

The SEC further warned that crypto assets could be exceptionally risky and often volatile. The commission said they are subject to significant risks ranging from enforcement of regulations that may prevent their use to the bankruptcy of the company holding the assets.

The regulator also noted that scammers use crypto assets’ popularity to defraud retail investors. It mentioned Ponzi, pyramid schemes, and rug pulls as some of the ways these bad actors perpetrate fraudulent acts.

The SEC wrote:

“It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”

Meanwhile, the SEC gave some investment tips which can help ensure investing success.

The language and timing of the publication raise eyebrows as the regulator has increased its scrutiny of the industry. On March 22, the SEC filed charges against crypto entrepreneur Justin Sun and issued a wells notice to U.S.-based exchange Coinbase.

Besides that, the bulletin is coming a few days after the White House Council of Economic Advisers published a report that heavily criticized cryptocurrencies, saying that most don’t have a fundamental value.

“They continue to cause risks for financial markets, investors and investors and consumers,” the report added.

Circle CEO Jeremy Allaire has warned about the risks facing the crypto market due to exposure to the U.S. Dollar and the regulatory risk in the U.S. financial system.

In a March 23 Twitter thread, Allaire said there “seems to be a large-scale risk-off from USD that is exposed to US banks and US regulatory risk.”

The CEO stated that there is general market anxiety revolving around the large-scale failure of the US banking system and the aggressive regulatory actions on crypto.

He noted the irony of companies with the highest level of compliance with US regulations and are most integrated with the banking system facing issues. This group is currently considered unsafe due to concerns about assets being stranded.

Allaire added that a macro risk was also driving rotation from USD into flagship digital assets — Bitcoin and Ethereum

Calls for regulation

The Circle CEO urged U.S. policymakers to be careful about their next steps.

He noted that their actions have started forcing market participants out of the U.S. into poorly regulated jurisdictions with higher risks and lax controls.

As such, Allaire said that the current situation calls for a “clear, coherent and pragmatic policy” if the U.S. does want to lose its position as a leader in the blockchain technology space.

USDC remains strong

Meanwhile, Allaire noted that Circle would continue to operate within the regulatory framework and comply with the highest standards and transparency.

He added:

“USDC has not missed a beat, we have never failed to mint or redeem USDC for $1, including during the past weeks stress test. As of last week, in the past year, we have redeemed $192.4B USDC at $1, and issued $176.9B at $1.”

The CEO also stated that Circle is adding new transit and settlement banking partners to ensure that it can process issuance and redemptions of digital dollars 24/7 and throughout the year.

Coinbase revealed in a March 22 filing that it has received a Wells notice from the U.S. Securities and Exchange Commission (SEC).

Coinbase could face charges

That Wells notice means that the SEC has made a preliminary determination that will see it recommend an enforcement action against Coinbase.

If the SEC does initiate legal action, it will most likely allege that Coinbase violated federal securities laws. The text of the filing suggests that the upcoming allegations concern parts of Coinbase’s main trading platform (ie. spot market), as well as other services such as Coinbase Earn, Coinbase Prime, and Coinbase Wallet.

Coinbase has publicly acknowledged the Wells notice on its blog. Though it confirmed that the above areas of service are under scrutiny, it also said that the notice does not include enough information for it to provide more a detailed response.

The company asserted that the SEC refused to identify particular cryptocurrencies and assets that may be considered securities. It also said that the regulator further refused to respond to its registration proposals in recent months.

The Wells notice follows engagement with the SEC. Coinbase said that the Wells notice is specifically tied to an SEC probe reported in the summer of 2022, though the company also engaged with the SEC for several years prior to that investigation.

Will Coinbase fight or settle?

Coinbase said today it is confident that its services are legal and that it “welcomes a legal process.” That vague phrasing does not exclude the possibility of a settlement.

By contrast, personal statements from Coinbase executives suggest that the company intends to fight the SEC in court. CEO Brian Armstrong said on Twitter that his company aims to show that the SEC “has not been fair, reasonable, or even demonstrated a seriousness of purpose.” Coinbase CLO Paul Grewal, meanwhile, said that the company will “avail [itself] of the court system to finally start to get some clarity for the crypto industry.”

It is also possible that Coinbase will not face charges. The company wrote in its latest blog post that the Wells notice “is not a formal charge or lawsuit, [but] can lead to one.”

However, crypto companies have been largely unsuccessful in fighting the SEC, so the regulator has little reason to refrain from filing charges.