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SEC Wants Crypto Exchanges to Stop Trading Against Clients

Earlier this month the SEC nearly doubled the size of its crypto regulatory unit.
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Part of the draw of cryptocurrencies has been the anonymity the digital assets afford.

But as bitcoin leads the market lower, that anonymity and lack of oversight may be coming to an end. 

 Cryptocurency exchange platform Coinbase Global  (COIN)  made waves Tuesday night after the company filed a 10-Q with the U.S. Securities and Exchange.

In it they said that their customers would be left out in the cold in the event of a bankruptcy. 

“Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors," Coinbase said in the filing.

The idea that all the crypto retail investors store on Coinbase could be seized if the company fails helped spook Wall Street.

Along with Coinbase's disappointing first quarter results, it was enough to drop the stock another 22% Wednesday.

Meanwhile, bitcoin prices continued their downward trajectory as the cryptocurrency looks to make it back to its support area at $32,000. 

Bitcoin prices are down more than 50% over the past six months. 

With the crypto market in flux, regulators at the SEC is taking the opportunity to tighten some screws on the exchanges.

SEC Regulators Take Exchanges to Task 

Earlier this week, Gary Gensler, chairman of the Securities and Exchange Commission, said he was concerned that crypto exchanges are not putting up the barriers needed to protect investors. 

Gensler accused exchanges like Coinbase of betting against their own customers in an interview with Bloomberg News

"Crypto’s got a lot of those challenges, of platforms trading ahead of their customers,” Gensler said. 

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“In fact, they’re trading against their customers often because they’re market-marking against their customers.”

Gensler says that exchanges are comingling different parts of their businesses like custody, market-making and offering a trading platform. 

That co-mingling is leading may lead to the platforms not acting in the best interest of the people using it.

As an example Gensler pointed out that Tether, USD Coin and Binance USD, the three biggest stablecoins, or digital currencies pegged to fiat currencies like the dollar, are all affiliated with cryptocurrency exchanges. 

“I don’t think that’s a coincidence. Each one of the three big ones were founded by the trading platforms to facilitate trading on those platforms and potentially avoid AML (anti-money laundering) and KYC (know your customers),” Gesler said. 

Tether, the largest stablecoin with an $83 billion market value, has ties to the people behind the Bitfinex crypto exchange, according to Bloomberg. 

USDC has ties to Coinbase and Binance, the world's largest crypto exchange is connected with Binance USD. 

SEC Seems Ready to Step Up Regulations

Gensler reiterated that most digital assets fall under the umbrella of the SEC for regulation and that venues trading them should register with the agency. 

With that in mind, Gensler also told Bloomberg that the SEC is increasing its enforcement activities. 

Earlier this month, the SEC announced that it is nearly doubling the size of its Crypto Assets and Cyber Unit by adding 20 additional positions to the unit. 

"By nearly doubling the size of this key unit, the SEC will be better equipped to police wrongdoing in the crypto markets while continuing to identify disclosure and controls issues with respect to cybersecurity," Gensler said

This week TerraUSD, which is based on an algorithm that is designed to maintain a one-to-one parity against the U.S. dollar, saw its peg broken over the weekend.

That triggered a slump in both UST prices themselves as well as another digital coin, Luna, that is mean to provide a trading pair.

UST was was last seen at around 38.5 cents, with the stable coin's main backer, Do Kwon, urging players to "sit tight" as its designers formulated a rescue plan.