What is the Wells Notice and why is it important in the cryptocurrency market?

Digital currency investors know very well that the price trend of these currencies changes based on supply and demand; Therefore, in order to gain profit from price fluctuations, it is very important to identify the factors affecting supply and demand.

While economic factors always affect the process of buying and selling digital currencies, in the meantime, some other conditions such as legislations can also affect supply and demand and price changes. Do not forget that until now the price of Bitcoin and digital currencies have fluctuated many times due to the process of legislation and its margins.

Due to the powerful economy and the extensive activity of digital currency companies in the United States, the conditions of operation and legislation of digital currencies have become very important in this country, and the decisions made by this country regarding the field of digital currencies are quickly followed in many other countries of the world and on the whole The field of digital currencies is influential.

The Wells notice is one of the legal tools used by the US Securities and Exchange Commission (SEC) regulatory agency, and today its name has reached the ears of digital currency investors. Given that recently this notice has been continuously issued to digital currency companies, investors and traders active in the market should familiarize themselves with its nature and why it is important.

In this article with help An article from the CoinMarketCap website (Coinmarketcap), we examine this notice and explain the consequences and how it will affect the cryptocurrency market. Therefore, if you are an investor in the digital currency market and have seen the destructive effects of the recent US legislative process in the digital currency market, do not miss reading this article.

America and digital currencies

While in the past years the digital currency market activists have continuously tried to comply with the US regulatory laws, recently the regulatory authorities of this country, especially the Securities and Exchange Commission (SEC), have targeted the prominent American digital currency activists and companies. The commission’s recent activities have made the Wells announcement a scary word for the digital currency market.

Coinbase (Coinbase) is among the companies that received the announcement of Wales on March 22, 2023 (April 2, 1402). This company is not the only company to receive a notice from Wells, and among other companies we can mention stablecoin publisher Paxos, which received Wells’ notice about its activities in the field of stablecoins.

This trend is expected to continue and in the coming months, Wells’ announcement will be issued to many other companies in the digital currency market. What does this warning mean?

What is the Wales Notice?

A Wells Notice is an official notice issued by the US Securities and Exchange Commission to notify individuals or companies of possible violations of securities laws. In effect, the notice serves as a warning and gives the recipient an opportunity to respond to the alleged violations before the SEC takes legal action.

So far, this notice has been issued to cryptocurrency companies for various reasons, including market manipulation and unregistered securities trading. When a company receives this warning, it may have far-reaching consequences for its reputation, making users’ continued activity on the platform doubtful.

Needless to say, companies are not legally required to disclose receipt of Wells notice; For this reason, many companies that receive this warning do not make it public. For example, cryptocurrency exchange and company Kraken recently settled with the SEC regarding its staking program. Due to this agreement, many in the cryptocurrency industry believe that Kraken has also received Wells’ notice.

After a Welsh notice is issued, companies tend to respond quickly and resolve the issue; Because otherwise, they will be fined and sued by the US Securities and Exchange Commission. It is worth noting that in all the notices, the company and the SEC do not agree, and like the Ripple issue, the lawsuit process and legal battle begin.

History of the Notice of Wales

The term and concept of the Wales declaration goes back to 1972 and the time of the establishment of the Wales Committee. The leadership of this committee is in charge of John E. Wells (John A. Wells) was working with the purpose of evaluating the SEC’s law enforcement practices and policies. After completing a thorough review and evaluation, the committee recommended several procedures that have been incorporated into current SEC policies. The announcement of Wales is one of them, which is named after the chairman of the commission that proposed this procedure.

Given that most of the notifications issued by Wales and the SEC complaints in the digital currency market are about violations of securities laws, it is good to know what securities are and what the violated laws refer to.

What are securities?

In the past years, investing in the digital currency market has become very popular and millions of people around the world are active in this volatile market; But the legal framework and the conditions required to operate in the digital currency market are unclear in most countries.

The lack of a clear legal and regulatory framework has created many problems for digital currency companies and investors. Also, part of the recent margin that the SEC has created is due to this lack of clear rules and numerous questions about securities.

Securities are tradable financial instruments that have financial value. Usually, to determine whether an asset is a security or not, a test called the Howey Test is used. In Howie’s test, if the contract is a financial investment, is in a joint venture, there is an expectation of profit, and the profit is derived from the efforts of third parties, the asset and contract are considered securities.

While this test provides a fairly simple guideline for determining what securities are, the US Securities and Exchange Commission has taken a contradictory approach on whether digital currencies are securities.

For example, in the recent hearing of the US Congress on the bankruptcy of the FTX exchange, Gary Gensler avoided answering whether Ethereum is also a security. It seems that the legal and regulatory authorities of the United States have not yet reached a conclusion about this issue. This is well seen regarding views of the nature of Ethereum; Because after the Commodity Futures Trading Commission (CFTC) called Ethereum a “commodity”, the New York State Attorney General declared it a security.

This issue is very important; Because if an asset is recognized as a security, it must follow the laws related to securities. It should be said that many digital currencies do not follow these rules and guidelines; For this reason, today they are in the focus of attention of the SEC. For many years, the legal nature of digital currencies has been discussed and exchanged, and until today, no precise answer has been given to the important question of whether digital currencies are securities or not.

What are the implications of Wales’ announcement?

Receiving a Welsh notice in the first instance damages the reputation of the companies; Because it indicates that the SEC is investigating the activities and the possibility of lawsuits and legal proceedings. This issue may be an alarm for the investors and colleagues of that company.

After issuing this warning, the company may face sanctions or fines or other forms of legal repression; For this reason, companies receiving this notice may close some of their services to avoid being fined. For example, some digital currency exchanges receiving this warning have closed their staking section or removed some currency pairs from their trading list.

If the SEC decides to take enforcement action after Wells’ notice is issued, it may freeze the companies’ assets or file formal charges against them in federal court. This lawsuit starts a long and complicated legal process; Where the company will have the opportunity to defend itself in front of the judge.

One of the high-profile complaints of the SEC in the field of digital currencies is for Ripple, whose judicial process has been followed since 2020. This trial is still ongoing and has not yet reached a conclusion. In the past years, the aforementioned lawsuit has acted as a heavy shadow on Ripple, and with the release of positive and negative news from the judicial process, this digital currency experiences price fluctuations. It is expected that the result of this court will have a significant impact on the digital currency market.

The process of issuing a Welsh notice and its effects

The Securities and Exchange Commission of America works to provide regulatory transparency and enforce federal securities laws, and its main goal is to protect the interests of investors and prevent violations. Issuing the Wells Notice is only one of the many tools the SEC has at its disposal to achieve its operational goals. Another important point is that the Wales notification is not issued to companies suddenly, and its issuance and follow-up include several steps. In general, the process of issuing the said notification is as follows:

• First, the Securities and Exchange Commission initiates and completes an investigation of a company that it believes has violated one or more securities laws. As a result of this process, the SEC gathers evidence about the alleged violations.
• Subsequently, the Securities and Exchange Commission issues a Wells notice to the company, specifying the investigation conducted and the consequences of the alleged violations.
• The company receiving this notice has 30 days to respond to the charges and declare its innocence.
• The SEC will carefully review the company’s response to Wells’ notice and decide whether to take enforcement action.

Wells’ announcement actually starts a conversation between the SEC and the company. This notice gives the company an opportunity to clarify its position on the allegations and then the next process, i.e. resolution of the problem or judicial follow-up and complaint, is carried out.

Typically, after receiving Wells’ notice, companies quickly engage experienced securities law attorneys to respond appropriately to the SEC’s allegations. To respond to this notice, companies have several options, which generally lead to two options: fight or compromise with the Securities and Exchange Commission.

If the company wants to agree with the Securities and Exchange Commission, in addition to paying the fine, it must stop the activities of the offending departments. If the company disagrees with the mentioned claims, it can collect evidence to support its innocence and start a legal fight.

It is worth noting that a Wells notice is not a subpoena and is very different. The Wells Notice is merely a warning about the enforcement actions of companies and organizations; While a subpoena is an order that obliges the judge to sign and the recipient to provide evidence in an investigation or legal proceeding.

While the SEC can also issue a subpoena, a Wells notice serves a different purpose and is sent to the company to warn it before legal proceedings begin.

The importance of paying attention to the announcement of Wales and its consequences

Some notices issued by Wales are not made public; But usually, big and reliable companies active in the field of digital currency publish this news, which has consequences and effects for the activity of that company and the price trend of the digital currency market.

For example, the release of the news of the issuance of the Wales Declaration for the Coinbase exchange caused an 8% decrease in the price of Bitcoin. The SEC’s recent crackdown on Binance US and other companies active in the field of digital currencies has consistently brought negative price signals and effects for digital currencies.

The effects of Wells’ announcement are not only psychological, and the actions of the Securities and Exchange Commission may lead to the closure of part of the activity of the exchange and companies, and as a result, lead to a large sale of digital currency capital in them.

Wells’ announcement recently also affected the stablecoin market, forcing Paxos to stop issuing new BUSD stablecoin tokens. Overall, this type of warning not only causes price fluctuations; It may also lead to the suspension of some products and services in the digital currency industry.

Currently, the ultimate goal of the SEC’s recent strictures is not clear, and no one knows what the SEC’s next action will be; Therefore, investors these days should carefully check the news related to the Welsh announcement and the legislation in the field of digital currencies in order to be prepared for unexpected price fluctuations.