SEC and tokenization of financial instruments

In 2023, the U.S. Securities and Exchange Commission (SEC) significantly tightened its approach to the cryptocurrency market. Under the leadership of Gary Gensler, the regulator set a course to combat fraud, opaque schemes, and tax evasion. The SEC views many tokens as potential securities and has classified them as unregistered securities in several cases; Bitcoin, as a rule, is not considered a security. Let’s break down the risks and opportunities this brings for market participants and how to protect your assets.

What risks does crypto regulation carry?

Retail investors

For individual users, new SEC measures can translate into serious risks:

• Blocking of accounts and assets. Seeking to comply with AML (anti-money laundering) and KYC (know your customer) requirements, exchanges may freeze addresses with suspicious or sanctioned labels. This means that funds in such accounts become inaccessible.
• Deterioration of liquidity. The delisting of tokens that the SEC has recognized as unregistered securities can lead to a sharp decline in their value.
• Loss of access to projects. For example, if a DeFi contract falls under sanctions, users may lose the ability to interact with the platform.

Institutional investors and exchanges

Large players also face risks:

• Increased compliance costs. Exchanges are required to strengthen AML screening and implement strict KYC procedures, which demands additional financial and technical resources.
• Reputational losses. Any error in regulatory compliance can lead to lawsuits or fines.

Token issuers and DeFi projects

Issuing projects find themselves under increased scrutiny:

• Regulatory audits. Any ICO that does not comply with U.S. securities laws can be halted.
• Legal liability. Issuers are required to disclose all information about tokens, including risks and financial statements.

How to protect yourself?

For retail investors

1. Check addresses before transferring. Use tools to analyze wallets for sanctioned labels or links to suspicious transactions.
2. Store assets on verified platforms. Choose exchanges and custodial services that comply with SEC requirements.
3. Diversify your portfolio. Do not invest all your funds in tokens that are at risk of being delisted.
4. Study the legal status of tokens. Ensure the token complies with the legislation of the country where you are investing.

For institutional investors

• Implement automated systems for real-time transaction monitoring.
• Conduct infrastructure audits, including smart contracts, to identify vulnerabilities.
• Enter into agreements with reliable AML/KYC providers.

For issuers and DeFi platforms

• Maintain transparency. Provide investors with up-to-date information about the project.
• Seek preliminary coordination with regulators. This can minimize the risk of enforcement actions by the SEC.
• Ensure smart contract security. Use multi-signature (multisig) and reliable key storage methods.

Summary

The SEC's tightening of measures is aimed at increasing the transparency of the cryptocurrency market, but it creates additional risks for all participants. To minimize these threats, it is important to invest mindfully, comply with regulatory requirements, and use AML/KYC verification tools. For example, checking wallets can help avoid interaction with sanctioned addresses, protecting your assets from being blocked.

As practice shows, adaptation to new requirements is not only a challenge but also an opportunity to improve investor protection and advance blockchain technology.