The following opinion editorial was written by Alex Forehand and Michael Handelsman for Kelman.Law.
With the total market cap of all cryptocurrencies up nearly 100% over the past year, new financial products and services are emerging everyday. Facing a “proliferation” of crypto assets, the SEC has been forced to recognize the technology is here to stay as crypto products are now attracting significant interest from both retail and institutional investors alike.
The SEC’s 2025 Examination Priorities outlines several focal points for those engaged in crypto-related activities, including broker-dealers, investment advisers, and other financial intermediaries that facilitate crypto transactions or offer crypto products. As crypto assets become more embedded in traditional financial portfolios, the SEC’s oversight will become more involved.
The SEC emphasized that it will continue investigating whether registrants meet their legal and regulatory obligations when recommending or advising on crypto assets. This includes an initial and ongoing understanding of the products, with a particular emphasis on crypto products marketed to retail investors.
Given the volatility and long-term uncertainty of the industry, the primary focus is on investments involving retirement assets, and those aimed at elder, retail investors. The SEC demands that advisers have a thorough understanding of these products before recommending them to clients who may not fully grasp the complexities and risks associated with the novel asset class. The SEC will also assess the scope of risk disclosures provided to clients, ensuring transparency around the particular risks associated with crypto investments.
The SEC’s emphasis on retail investors suggests that the regulator is particularly concerned with mitigating investor harm, especially given the prevalence of misleading marketing practices and complex, high-risk investment products. This underscores the SEC’s broader efforts to bolster investor protection in an environment where retail investors are increasing their participation at unprecedented rates, often with limited understanding of the underlying risks.
With the spotlight on retail investors, especially those using retirement products to invest in crypto, firms should be prepared to justify their recommendations and provide evidence of thorough product vetting before offering their products.
Given the pseudonymous nature of the technology, however, know-your-customer requirements have been a consistent hurdle for those offering crypto products. Nonetheless, regulatory demands will continue forcing the industry to comply via innovative solutions, and participants must ensure they conduct comprehensive due diligence on users before allowing them to invest and keep the required transaction records for compliance reviews.
The SEC has also reemphasized the need for those offering crypto products to abide by standard accounting principles by demanding up-to-date valuation procedures, as crypto’s price volatility and illiquid nature creates challenges in consistently and accurately pricing these assets for investors. Those registered with the SEC will also be scrutinized for their compliance frameworks, with an emphasis on those areas that are particularly unique to crypto assets.
These aspects include reviewing practices related to wallet security, custody solutions, and adherence to anti-money laundering / counter-terrorist financing obligations under the Bank Secrecy Act.
The final concern reflected in the SEC’s Examination Priorities surrounds the technological risks posed by the adoption of blockchain and distributed ledger technology. Given the complexities of securing crypto assets and ensuring data integrity, registrants must demonstrate strong cybersecurity measures and durable “business continuity plans.”
As incidents of hacking and asset misappropriation continue to mar the space, the SEC’s focus will likely include vetting firms’ defenses against cyber threats and evaluating their ability to safeguard clients’ digital assets in a responsible manner. In light of the SEC’s emphasis on technological risks, firms would be well-advised to invest in secure custody solutions and demonstrate sound practices for protecting clients’ digital assets against both internal and external misuse.
The 2025 Examination Priorities unfortunately suggests the SEC intends to maintain its current trajectory of enforcement and oversight, rather than pivot towards a more bespoke regulatory framework for digital assets. Despite the industry’s pleas for more tailored regulations, the SEC will continue analyzing crypto assets through the lens of its “time-tested” securities laws.
The report makes clear that crypto assets remain at the forefront of the SEC’s agenda. As the market for digital assets continues to evolve, so too does the SEC’s approach to oversight. By focusing on investor protection, compliance practices, and technological risks, the SEC remains committed to ensuring that the burgeoning crypto industry adheres to the high standards expected of the broader financial market. However, given the recent announcement that SEC Chairman Gary Gensler is resigning as of January 20, 2025, it is unclear whether these priorities will remain the same once President Trump appoints the new SEC Chair.
Industry participants should take heed and prioritize compliance, transparency, and risk management to navigate this increasingly scrutinized regulatory environment. As attorneys operating exclusively in the digital asset space, we understand the importance of staying up to date on the latest developments and helping clients stay informed whenever the legal landscape shifts.
Whether you are an investor, entrepreneur, or business involved in cryptocurrency, our team is here to provide the legal counsel needed to maneuver this complex landscape. If you believe we can be of assistance, schedule a consultation here.
This article originally appeared at Kelman.law.