How Does the SEC Regulate Crypto?

In the first half of 2023, cryptocurrencies like Bitcoin (BTC) have rebounded from the losses they experienced in 2022. Despite this recovery, the protracted crypto winter exposed flaws in the digital currency exchanges, exposing vulnerabilities including excessive risk-taking, fraudulent activities, illicitly authorised and securities promotion.

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The US SEC (Securities and Exchange Commission) has intensified efforts to regulate the cryptocurrency sector. While some investors believe that additional regulations will increase the market’s validity, others are concerned that excessive regulatory intervention may erode the decentralised aspect that attracted so many users to cryptocurrencies in the first place. Finding a balance among regulation and keeping the essential attractiveness of cryptocurrencies is challenging for regulators and other players in the market.

Is Crypto a Security?

The regulation classification of cryptocurrencies is still an issue of significant debate, with discussions focusing on whether they should be categorised as securities, commodities, currencies, or something completely different. The Commodity Futures Trading Commission (CFTC), which already overseas markets for other commodities like natural gas and crude oil, would be in charge of cryptocurrencies if they were determined to be commodities. Instead, the SEC, which oversees stocks and bonds, would have control over them if they were recognised as securities.

Howey Co. stresses the need for companies operating in the cryptocurrency sector to adhere to the law, and that the SEC would actively look into and enforce regulations up until that point. The classification and oversight of cryptocurrencies are still being discussed, and the regulatory landscape for them is still in flux.

SEC Crypto Crackdown Timeline

Timeline for SEC’s Crypto Crackdown Since the FTX cryptocurrency exchange collapsed in 2022, the SEC and other regulatory organisations have increased their efforts to fight illicit activities in the cryptocurrency business. This crackdown, nevertheless, has come facing fire and criticism.

• Republicans on the House Financial Services Committee accused SEC Chair Gary Gensler in April 2023 of driving cryptocurrency platforms out of the United States and jeopardising the country’s position as a leader in the development of digital assets globally.
• In April, Coinbase also filed a petition asking the courts to issue an order compelling the SEC to respond to their 2022 request for clear guidelines on the classification of tokens as securities and guidance on how to legally register with the SEC.
• The largest cryptocurrency exchange in the world, Binance, is being sued by the CFTC in March 2023 for allegedly allowing US users to trade unregistered securities.
• In March, the SEC sent Wells notices to stablecoin issuers Paxos and Coinbase, alerting them to potential securities law violations.
• The SEC ordered Kraken to halt its crypto staking operation in the United States in February and later assessed the company a $30 million disgorgement and civil penalties.
• The SEC filed charges against FTX founder Sam Bankman-Fried and multiple executives in the wake of the company’s collapse in November 2022, citing their role in misleading investors. Gary Wang, Caroline Ellison, and Nishad Singh are among the FTX executives who have entered guilty pleas and are cooperating with the prosecution.
• The regulatory efforts aim to bring accountability and transparency to the cryptocurrency market, but the intense scrutiny has raised discussions about how it would affect innovation and the market’s capacity to compete competitively.

The Bottom Line

In response to incidents such as the FTX crash, the regulatory crackdown on illegal activities related to the cryptocurrency industry has stepped up. While promoting accountability and transparency, it also raises questions about possible impacts on innovation and the competitiveness of the U.S. crypto market.

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