Original author: Huo Huo
There has been a lot of regulatory and negative news recently. On June 28, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Consensys, accusing it of failing to register as a broker through the MetaMask swap service. This was only two weeks after the SEC notified Consensys that it had ended its investigation into Ethereum 2.0.
According to relevant information, the SECs first crackdown on cryptocurrencies began in 2017 , when it established a cyber unit to deal with a decentralized autonomous organization called The DAO. Later, the unit was renamed the Crypto Assets and Cyber Unit, and the SEC increased its supervision of the cryptocurrency market, launching a series of enforcement actions against unregistered securities issuance, fraud, and market manipulation.
In 2023, the SEC enforced the law more vigorously, taking a record 46 actions, an increase of 53% from 2022. In particular, the $4.3 billion fine on the leading trading platform BN and the resignation of its CEO Zhao Changpeng CZ caused a sensation both inside and outside the circle.
2024 will be the seventh year that the SEC has been cracking down on cryptocurrencies, and the two sides are still in the game. So, what actions has the SEC taken recently? What impact will it have on the development of cryptocurrencies?
01 The SEC’s recent entanglement with crypto
The SEC (Securities and Exchange Commission) is an agency under the U.S. government that regulates the stock market to maintain transaction transparency, combat fraud schemes, and protect investors confidence in the stock market. To this end, the SEC has formulated securities registration rules and supervised their implementation.
Image source network
As for the crypto industry, in fact, it has been regulated since the development of crypto in 2013. However, many small actions have not attracted much attention from the public. In June this year, the media in the industry wrote an article SECs Crypto Enforcement Action: A List of 20 Major Charges Initiated by the SEC, which listed 20 major regulatory projects since the SEC began to regulate crypto, including the collapse of FTX and the fine of BN.
Image source: SEC official website
In 2024, in addition to the prosecution of Consensys mentioned at the beginning of the article, the SEC also carried out a number of activities and updates in the field of encryption and DeFi. Let’s take a look at it together:
1) Approval of Bitcoin ETF
On January 11, 2024, the SEC approved a Bitcoin ETF , marking a major regulatory milestone. This key decision paves the way for mainstream investors to participate in the Bitcoin market, which is known for its high volatility and innovation.
The crypto community cheered this as it was a big step towards legitimizing cryptocurrencies as an accessible investment option for the general public.
2) SEC Redefines “Dealer”
On February 6, 2024, the SEC adopted new crypto regulatory rules. These rules require a wider range of market participants to register with the SEC, join self-regulatory organizations, and comply with existing securities laws and regulations.
The document expands regulatory oversight of the cryptocurrency and DeFi sectors by detailing terms such as “dealer” and “government securities dealer” and clarifying what constitutes participation “as part of the normal course of business.”
However, the regulations require that the entity manage or control assets worth at least $50 million.
The crypto community reacted negatively to this update:
The DeFi Education Fund criticized the SEC’s new rules as misleading, highlighting the lack of viable compliance paths for DeFi participants and calling the approach impractical and stifling innovation.
Marisa Coppel, legal director of the Blockchain Association, believes that the revised definition of dealer sets unrealistic standards for DeFi projects and lacks clarity.
3) Suing Uniswap
On April 10, Uniswap Labs posted a news on Twitter, saying: We received a Wells Notice from the SEC.
What does a “Wells Notice” mean? In simple terms:
Wells Notice = A declaration of war from the SEC, which means: We are going to sue you. See you in court.
The SEC’s main complaints against Uniswap are the following three things:
A. Uniswap Labs provides broker services through the wallet app;
B. UNI Token is an unregistered security;
C. Uniswap Labs operates a trading platform that sells unregistered securities.
Then in May, Uniswap submitted a 40-page document to the SEC, which detailed the allegations and is subject to further updates.
4) Suing Robinhood
Robinhood is a financial services company in the United States. On May 4, the company also received a Wells Notice from the SEC.
Later, Dan Gallagher, Robinhoods head of legal, compliance and business, said in a statement that the company has maintained direct communication and cooperation with the SEC on its crypto products for many years, including the well-known come in and register attempt, but was disappointed that the SEC still issued them a Wells Notice.
However, it is not clear from previous letters which tokens the SEC has determined to be securities, but it is worth noting that Robinhood has proactively removed some tokens from the list - including Solana (SOL), Polygon (MATIC), and Cardano (ADA) - in response to previous SEC lawsuits against rival trading firms.
5) Ethereum ETH approval
On April 26, 2024, Consensys Software Inc., a software developer for the Ethereum blockchain, sued the SEC in a federal court in Texas over Ethereum regulation. The approval of the Ethereum ETF undoubtedly indicates that the SEC will officially abandon its position that ETH is a security.
On May 23, 2024, the SEC approved the sale of the spot Ethereum ETF. This was the second landmark decision made by the SEC in five months after the Bitcoin ETF, which also surprised the crypto community.
ETH, the native token of the Ethereum blockchain, is the second largest cryptocurrency in terms of market capitalization after Bitcoin. Naturally, after the Bitcoin ETF was approved, a large number of applications for ETH ETFs also came in and were submitted to the SEC.
In this event, the SEC approved multiple ETH ETF applications under Form 19b-4.
However, unlike the Bitcoin ETF, which started trading the day after it was approved, the Ethereum ETF’s approval does not require all documents to be approved. Therefore, before the Ethereum ETF starts trading, the fund also needs to obtain approval for the S-1 document disclosure, which will include detailed information about the fund, such as fees and how the product works. The SEC does not set a specific deadline for approving the S-1 document, so it may take some time before the Ethereum ETF can be traded.
However, the Ethereum ETF is about to be approved, and the community is looking forward to which cryptocurrency may become the next ETF candidate.
6) FIT 21
As the election year approaches, cryptocurrency has become an important voting group. Trump accepted cryptocurrency donations and criticized the Biden administrations cryptocurrency policy. The Biden administrations future response to cryptocurrencies may also turn softer.
Just on May 24, the U.S. House of Representatives officially passed the 21st Century Financial Innovation and Technology Act (FIT 21). The bill was led by the Republicans, supported by many Democratic members, and was eventually approved.
The main task of the FIT 21 proposal is to define which aspects of cryptocurrency regulation fall under the jurisdiction of the U.S. Securities and Exchange Commission (SEC) and which fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC). In the past, the dual regulation of cryptocurrencies by the SEC and CFTC has always been a pain point in the United States. The supervision of the two departments is very strict, and there is obvious competition for regulatory power.
The approval marks an important milestone for the cryptocurrency industry and, although formal implementation will take time, provides new opportunities for investors and suggests that the regulatory environment may improve further in the coming months.
7) Suing Coinbase
On June 6, the SEC sued Coinbase, accusing it of illegally operating a crypto asset securities business without registration.
The SEC wrote in a complaint filed in federal court in Manhattan that since at least 2019, Coinbase has made billions of dollars by operating as a middleman for crypto asset trades while evading disclosure requirements designed to protect investors.
The SEC said Coinbase traded at least 13 crypto assets that are supposedly registered securities, including tokens such as Solana, Cardano and Polygon.
Image source: SEC official website
This is another major trading platform being sued by the SEC after the leading trading platform BN was sued last year.
8) Suing Crypto Banks
On July 1, Reuters reported that the SEC sued crypto bank Silvergate Capital in a federal court, accusing it of securities fraud.
The SEC said Silvergate misled investors about its banking secrecy, anti-money laundering (AML) compliance program, and poor financial condition after the FTX collapse in 2022. At the same time, the bank failed to detect nearly $9 billion in suspicious transfers from FTX and its affiliated entities.
On July 2, Silvergate agreed to pay $63 million to settle allegations by U.S. and California regulators of internal management failures and disclosure of improper information to investors.
02 Why the SEC is so obsessed with the crypto industry
Crypto regulation exists in different countries around the world. Due to the special status of the United States, the market size and the degree of perfection of relevant laws and regulations, the SEC has to choose to strictly regulate cryptocurrencies through legal provisions. The apparent starting point is to: investor protection, market stability maintenance, AML and other legal provisions, but from the launch of Bitcoin and Ethereum spot ETFs and past legal action targets, other clues can be seen:
1) The Game Behind the US Election
Since there are a large number of crypto enthusiasts in the United States, it is no longer a small group. Trumps previous goodwill towards the crypto industry has led to a relaxation of the attitude of the SEC under Biden and his party, allowing the Ethereum spot ETF, which had no hope of passing, to go through the process one after another. For details, see the previous article: Trump and Biden compete to win over Bitcoin, is the US crypto regulation about to change direction?
2) Consideration of the status of the US dollar
Although encryption and Web3 innovation are there, financial innovation also comes with certain risks. The rise of Bitcoin has challenged the hegemony of the US dollar to a certain extent, and crypto assets led by Bitcoin have become a tool to bypass the hegemony of the US dollar. At the same time, due to its decentralized nature, the United States, which advocates free values, knows that it is almost impossible to eliminate it. Therefore, it is better to unblock than to block, guiding or even controlling this powerful tool to form a situation that is favorable to the future status of the US dollar is the only feasible way.
The current mission of the SEC is to suppress and prevent crypto-financial companies from getting out of control in a timely manner. Crypto-platforms with excessive market power and some mainstream projects are regulating their behavior through legal actions, which will ultimately lead to development in a direction that is beneficial to U.S. crypto-financial innovation, the status of the U.S. dollar, and the digital dollar market.
In general, every crypto regulatory event of the SEC is very eye-catching, and behind it is the consideration of the balance between innovation and risk and the strategy of maintaining the US dollar.
03 Will SEC regulation be good or bad for the crypto industry?
The supervision of the SEC has played a key role in ensuring the fairness, transparency and stability of the market, and has promoted financial innovation and investor protection to a certain extent. However, the regulatory measures have also brought some compliance costs, which have curbed the development of the market to a certain extent.
1) Positive impact
To be fair, the SEC is not trying to be a villain. Its original vision is to protect American investors involved in risky assets, promote fair practices, and enhance market integrity by curbing price manipulation and vigilant supervision. With the strengthening of enforcement actions, fraud prevention can be effectively prevented, protecting investors from traps that have appeared in previous platform collapses such as FTX and Terra (LUNA).
By approving the creation of a Bitcoin ETF in the United States, the SEC opens the door to broader investment in cryptocurrencies, potentially stabilizing and bolstering market confidence in these assets.
In addition, the SECs focused disclosure standards ensure transparency, helping investors make more informed investment decisions. As the SECs regulatory umbrella becomes more attractive to traditional investors and institutions, more legal and compliant developments will attract a wider range of adopters. In addition, the SECs involvement in addressing issues of global concern helps reduce cross-border cooperation in crypto-related crimes.
2) Negative impact
The market development has been suppressed in the short term. The most obvious consequence is the large-scale withdrawal of cryptocurrency companies and projects from the United States. For example, most initial Token Offerings (ICOs) are not open to US citizens today. Several trading platforms, such as Poloniex and Bittrex, have also chosen to withdraw from the US market after paying millions of dollars in fines. In addition, the SEC has identified certain tokens as securities, which will cause trading platforms to remove these tokens, which in turn affects investors.
Moreover, the strict cryptocurrency rules imposed by the SEC have not only affected many cryptocurrency investors in the United States, but also hit cryptocurrency investors abroad. Other jurisdictions around the world may be tempted to imitate these rules, resulting in a loss of innovation and a reduction in the adoption of cryptocurrencies by the sectors that need it most, such as the unbanked population.
The SEC has expanded the definition of dealer, which has caused concerns among DeFi participants and the wider crypto community. On the one hand, this new definition may impose a considerable regulatory burden on entities within the crypto space, which may slow down innovation and complicate compliance efforts; on the other hand, in the case of cryptocurrency companies, they need to follow complex rules, audits, and daunting numbers because they need to pay compliance costs if they want to enter the US market. Refer to the example of BN, whose CEO Zhao Changpeng pleaded guilty in November 2023 to violating US anti-money laundering restrictions, prompting a $4.3 billion settlement agreement between the platform and the US government.
04 Summary
There is no doubt that the SECs crypto regulatory landscape will continue to evolve in 2024. According to relevant reports, the SEC has been cautious in formulating new specific rules for cryptocurrencies. To address violations, the commission currently mainly applies and interprets existing securities laws, such as:
Securities Act of 1933
Securities Exchange Act of 1934
Investment Company Act of 1940
Investment Advisers Act of 1940
Sarbanes-Oxley Act of 2002
Dodd-Frank Wall Street Reform and Consumer Protection Act
The core issue of SEC crypto regulation is whether crypto can be classified as securities, and the SEC has not yet provided a clear classification for all cryptocurrencies.
SEC Commissioner Hester Peirce said at the ETHDenver conference on February 29 this year that the U.S. investment regulator’s current stance on the cryptocurrency industry is “law enforcement only mode, and mainly follows a court-first approach .” In her view, only with clearer regulations can the industry focus on innovation.
Regardless, achieving the right regulatory balance is a prerequisite for effective development. Crypto regulation aims to protect investors from fraudulent schemes and ensure market integrity. For example, by enforcing KYC and AML guidelines, authorities can prevent the abuse of crypto platforms for illegal activities. These initiatives are generally welcomed as they increase the security and attractiveness of cryptocurrencies as an investment option, potentially attracting more participants and enhancing market robustness.
However, excessive regulation could undermine a fundamental principle of cryptocurrency : decentralization. Cryptocurrencies are designed to operate without central oversight, but if only large, well-resourced companies can comply with complex regulations, the cryptocurrency ecosystem could lean toward centralization.
It can only be said that now, both the crypto industry and regulators are facing complex challenges. When formulating laws, regulators must retain the value of cryptocurrencies, their ability to innovate and decentralize, while reducing potential risks to the market. The crypto industry needs to promote market innovation and development while not violating the principles of legality and compliance.
