The U.S. Securities and Exchange Commission’s (SEC) newfound enthusiasm for the crypto sector is exposing investors to a growing risk of regulatory arbitrage, warns the World Federation of Exchanges (WFE), which is calling for the regulator to be more careful in granting exemptions.
In a letter to the SEC’s crypto task force, the WFE, an industry trade group for exchanges and clearinghouses, said the growth of unregulated crypto trading platforms and broker-dealers offering so-called “tokenized equities” is raising “serious concerns.”
“These products are marketed as stock tokens or the equivalent to stocks when they are not. This development poses multiple and interconnected risks,” it said. “These offerings often bypass established safeguards, creating risks for investors, undermining market integrity, and enabling regulatory arbitrage.”
Given these concerns, the WFE called on the SEC to ensure that firms aren’t using exemptive relief in the crypto space “to circumvent statutory obligations.”
The group said that while it supports the principle of granting exemptive relief from specific requirements to ensure a level playing field, it’s “concerned that the broad use of such relief presents great risks to investors, market integrity, and competition, all of which have negative consequences for U.S. markets.”
The WFE argued that the SEC’s exemptions should be narrow and time-limited, or should carry conditions that enable the regulator to “assess risks, gather data, and make adjustments before establishing a more permanent framework.”
It also said the relief should specify that firms remain subject to SEC oversight, that they have clear governance structures and investor safeguards, such as asset segregation requirements, and stipulating that they must meet their anti-money laundering obligations.
“We support innovation where it is pursued responsibly so that neither investors nor market integrity are put at risk,” said Nandini Sukumar, CEO of the WFE, in a release.
“The SEC should avoid granting exemptions to firms attempting to bypass regulatory principles that have safeguarded markets for decades,” she added.