SEC Commissioner Questions Investor Protections in Crypto: “Do They Actually Have Them?”

SEC Commissioner Caroline A. Crenshaw has raised fresh concerns over the absence of basic safeguards for retail investors trading crypto assets, drawing attention to structural risks that remain unaddressed under the agency’s current leadership. At the second session of the SEC’s Crypto Task Force Roundtables in Washington, D.C., Crenshaw outlined a regulatory landscape in which crypto platforms continue to operate with minimal oversight while investor expectations remain dangerously out of sync with reality.

The event, titled “Between a Block and a Hard Place: Tailoring Regulation for Crypto Trading,” centered on how crypto trading activity challenges the SEC’s existing regulatory frameworks. Crenshaw made clear that she views the issue through the lens of the individuals most at risk.

“What is a retail investor’s expectation?”

“This topic is of particular interest to me because it wades into some of the practical implications, questions, challenges, and risks that impact actual investors who own – and, therefore, trade – crypto of all varieties,” she said. “Any conversation about crypto trading quickly reveals the immense complexity and unique nature of these transactions.”

Crenshaw questioned how well individual investors understand the true nature of their protections, or lack thereof. “What is a retail investor’s expectation for how their crypto investments move through a trading platform? What protections do they naturally assume they have based on crypto companies’ marketing and their experience with more traditional investments?” she asked. “Do they actually have the benefit of those protections in practice? In my view, they should. But… do they? And if they don’t, how are they warned of that?”

She drew a sharp comparison between traditional financial infrastructure and crypto trading platforms, which often bundle multiple functions, brokerage, custody, and clearing, within a single entity. In regulated markets, these responsibilities are separated to avoid conflicts of interest and to protect client assets.

“Crypto trading platforms are unique because, among other reasons, they often perform multiple services under one roof, sometimes including brokerage, clearing, and custody,” Crenshaw said. “Each of these functions is vitally important to maintaining the safety and integrity of assets entrusted by investors to such entities. In traditional finance, they are typically performed by separate registered entities. That’s because of the high risk of conflicts of interest and risks for investors.”

According to Crenshaw, many of these crypto businesses do not fall under the supervision of any regulator. “Because many of these entities are not registered with any regulator (not the SEC, not the states, and not an SRO), they do not comply with laws designed to minimize these risks and potential conflicts,” she explained. “Though the SEC has urged investors to exercise caution, in some instances, we have seen those risks materialize in a way that has caused significant market disruption and harm to investors.”

She cited examples of recent events where retail investors suffered losses due to these structural weaknesses. “After those instances, we become painfully aware of the mismatch between investor expectations and reality,” Crenshaw said. “Investors didn’t realize that their crypto may be held in a single wallet controlled solely by the exchange. Investors didn’t realize that custodially held crypto would be treated as property of the exchange in a bankruptcy proceeding. Investors didn’t realize that their investments were not covered by any FDIC or SIPC insurance.”

Crenshaw added that these misunderstandings could cause harm not only to individuals, but to broader market systems. “These ongoing, unmitigated risks pose a larger threat to orderly functioning of the crypto markets and potentially also to the banking system and traditional finance,” she said.

Her comments suggest that under the current SEC leadership, which has prioritized enforcement actions but not introduced clear, comprehensive crypto regulations, investor protection in digital asset markets remains insufficient. The ongoing mismatch between what investors assume and what is actually guaranteed continues to widen.

Crenshaw concluded her remarks with a call for engagement from all stakeholders. “So, where do we go from here? That’s where you and this roundtable come in,” she said. “How do we approach the question of crypto exchange registration? How do on- and off-chain transactions comply with broker-dealers’ best execution obligations? How can we address and minimize custody risks and conflicts of interest?”

“Together, let’s explore answers to these difficult questions that can both protect investors and markets.”

The Crypto Task Force Roundtables are part of a broader initiative to gather input from across the financial sector. But Crenshaw’s statements made clear that progress has been slow and that, in her view, retail investors remain exposed to hidden vulnerabilities in crypto markets, with few meaningful safeguards currently in place.