The recent regulatory and negative news has been constant. 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 exchange service. This was just before the SEC notified Consensys to end its control of Ethereum. The Fang 2.0 survey has only been conducted for two weeks.
According to relevant information, the SEC’s first crackdown on encryption began in 2017, when the Cyber Division was established to deal with a decentralized autonomous organization called The DAO. Later, this department was renamed the Crypto Assets and Internet Department, and the SEC increased its supervision of the cryptocurrency market and launched a series of enforcement actions targeting unregistered securities issuance, fraud, and market manipulation.
In 2023, the SEC enforced stronger laws and took a record 46 actions, a 53% increase from 2022, especially the $4.3 billion fine against the top exchange Binance and the resignation of its CEO Changpeng Zhao. It is a sensation inside and outside the circle.
In total, 2024 will be the seventh year that the SEC has cracked down on encryption regulations, 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 encryption?
SEC’s recent tangle with crypto
The U.S. Securities and Exchange Commission (SEC) is an agency under the U.S. government that regulates the stock market to maintain transaction transparency, combat fraud schemes, and protect investor confidence in the stock market. To this end, the SEC establishes securities registration rules and oversees their implementation.
Source: Internet
Regarding the encryption industry, regulation has actually begun as early as 2013, when encryption developed. It’s just that many small actions have not attracted public attention. In June this year, the media in the circle wrote an article "SEC’s Encryption Enforcement Actions: A List of 20 Major Charges Launched by the SEC", which listed 20 major charges since the SEC began to regulate encryption. Regulatory projects, including FTX’s collapse, BN’s fines, etc.
Source: SEC official website
In 2024, in addition to the indictment of Consensys mentioned at the beginning of the article, the SEC also conducted a number of activities and updates on the encryption and DeFi industries. Let’s take a look below:
1) Approval of Bitcoin ETF
On January 11, 2024, the SEC approved a Bitcoin ETF, a major regulatory milestone. This critical 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 is cheering this as it is a big step forward in legitimizing cryptocurrencies as an investment option available to the general public.
2) SEC redefines “dealer”
On February 6, 2024, the SEC passed new crypto regulatory rules. These rules require a broader set of market participants to register with the SEC, join self-regulatory bodies and comply with existing securities laws and regulations.
The document expands regulatory oversight of the cryptocurrency and DeFi industries by detailing the terms "dealer" and "dealer in government securities" and clarifying what constitutes participation "as part of normal business."
However, these regulations require that the entity must 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) Sue Uniswap
On April 10, Uniswap Labs posted a news on X, stating: "We received a Wells Notice from the SEC."
What does "Wells Notice" mean? simply put:
Wells Notice = A declaration of war given to you by the SEC, which means: "We are going to sue you, and we will see you in court."
Image source: uniswap.org
The SEC mainly accuses Uniswap of the following three things:
Uniswap Labs provides trading broker (Broker) services through the wallet App;
UNI Token is an "unregistered security";
Uniswap Labs operates a trading platform that sells “unregistered securities.”
Then in May, Uniswap submitted a 40-page document to the SEC to counter the accusations in detail, which will be updated later.
4) Sue Robinhood
Robinhood is a financial services company in the United States. On May 4, the company also received a Wells Notice from the SEC.
Dan Gallagher, Robinhood’s head of legal, compliance and corporate, said in a statement that the company has been in direct communication and cooperation with the SEC regarding its crypto products for many years, including its well-known attempts to register, but the SEC still gave them Disappointed to send Wells Notice.
However, it is not clear from the previous letter which tokens the SEC determines 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’s approval
On April 26, 2024, Consensys Software Inc., the software developer of the Ethereum blockchain, sued the SEC in a Texas federal court over Ethereum regulatory issues. The approval of an Ethereum ETF leaves no doubt that the SEC will officially abandon its position that Ethereum is a security.
On May 23, 2024, the SEC approved the sale of an Ethereum spot ETF, the SEC’s second landmark decision in five months after the Bitcoin ETF, which also surprised the crypto community.
Ethereum, the native token of the Ethereum blockchain, is the second-largest cryptocurrency by market capitalization after Bitcoin. Naturally, after the Bitcoin ETF was approved, a large number of applications for the Ethereum ETF also came in and were submitted to the SEC.
In this incident, the SEC approved multiple Ethereum ETF applications under Form 19b-4.
It’s just that unlike the Bitcoin ETF, which started trading the day after it was approved, not all documents were approved for Ethereum’s approval. Therefore, before the Ethereum ETF can begin trading, the fund will also need to obtain S-1 filing approval, which will include details of the fund, such as fees and how the product works. The SEC has not set a specific deadline for approving the S-1 filing, so it may be some time before the Ethereum ETF trades.
However, the Ethereum ETF is about to be approved, and the community is excited to see which cryptocurrency may become the next ETF candidate.
6) FIT 21 Act
As an election year approaches, cryptocurrencies become an important voting bloc. Trump accepts cryptocurrency donations and criticizes the Biden administration's cryptocurrency policy. The Biden administration's future response to encryption may also turn soft.
No, on May 24, the U.S. House of Representatives officially passed the Financial Innovation and Technology Act of the 21st Century (FIT 21 for short). The bill was led by Republicans, supported by many Democratic lawmakers and ultimately 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 aspects 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 been a sore point in the United States. The regulation of the two departments is very strict and there is obvious competition in regulatory power.
The approval represents an important milestone for the cryptocurrency industry, and although formal implementation will still take time, it provides new opportunities for investors and indicates that the regulatory environment may further improve in the coming months.
7) Sue 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 Manhattan federal court that since at least 2019, Coinbase made billions of dollars by operating as an intermediary for trading crypto assets while evading disclosure requirements designed to protect investors. .
The SEC said Coinbase traded at least 13 cryptocurrency assets that were supposedly registered securities, including tokens such as Solana, Cardano and Polygon.
Source: SEC official website
This is another major trading platform sued by the SEC after the leading trading platform BN was sued last year.
8) Sue 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 bank secrecy regime, anti-Money Laundering (AML) compliance program and poor financial condition following the 2022 FTX collapse. At the same time, the bank failed to detect nearly $9 billion in suspicious transfers from FTX and its associated entities.
On July 2, Silvergate agreed to pay $63 million to settle charges from U.S. and California regulators that it committed internal management failures and disclosed bad information to investors.
Why is the SEC so stubborn about the crypto industry?
Different levels of crypto regulation exist in various countries around the world. Due to the special status of the United States, the size of the market and the perfection of relevant laws and regulations, the SEC has to choose to strictly regulate cryptocurrencies through legal provisions. The apparent starting point is for: investor protection, maintenance of market stability, AML and other legal provisions. Some content, but other clues can be seen from the launch of Bitcoin and Ethereum spot ETFs and past legal action targets:
The game behind the US election: Due to the large number of encryption enthusiasts in the United States, they are no longer a small group. Trump’s previous overtures to the encryption industry have led to a softening of the attitude of the SEC under the control of Biden and his party, leaving no hope of passing The Ethereum spot ETF has been able to pass the process one after another.
Dollar Status Considerations: While crypto and Web3 innovations are out there, financial innovation also comes with certain risks. The rise of Bitcoin has challenged the hegemony of the US dollar to a certain extent. Crypto-assets led by Bitcoin have vaguely become a tool to bypass the US dollar’s encryption hegemony. At the same time, due to their decentralized characteristics, the United States, which advocates liberal values, has clearly eliminated it and almost eliminated it. It's something impossible to accomplish. Therefore, "blocking is worse than opening up." The only feasible way is to guide or even control this powerful tool to form a situation that is beneficial to the future status of the US dollar.
The current heavy responsibility on the shoulders of the SEC is to timely suppress and prevent crypto-financial companies from getting out of control. Crypto platforms and some mainstream projects with excessive market power are regulating their behavior in their legal actions, which will ultimately lead to the establishment of crypto-financial innovation in the United States and the status of the US dollar. , the digital dollar market is developing in a favorable direction.
Overall, each of the SEC’s crypto regulatory incidents is very high-profile, and behind it is the consideration of the balance of innovation and risk, as well as the strategy of safeguarding the US dollar.
Will SEC regulation be good or bad for the crypto industry?
SEC supervision plays a key role in ensuring market fairness, transparency and stability, and to a certain extent promotes financial innovation and investor protection. But at the same time, regulatory measures also bring some compliance costs, which to a certain extent curbs the development of the market.
1) Positive influence
To be fair, the SEC is not trying to be a villain. The original vision is to protect American investors involved in risky assets, promote fair practices and enhance market integrity through curbing price manipulation and vigilant supervision. With increased enforcement action, fraud prevention can be effectively prevented, protecting investors from the pitfalls seen in previous collapses of platforms 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 increasing market confidence in these assets.
In addition, the SEC's focused disclosure standards ensure transparency, helping investors make more informed investment decisions. As the SEC's regulatory umbrella becomes more attractive to traditional investors and institutions, the development of more legal compliance will attract a wider range of adopters. Additionally, the SEC’s involvement addresses global concerns and helps reduce cross-border cooperation in crypto-related crimes.
2) Negative impact
In the short term, the development of the market has been suppressed, and the most obvious consequence is the massive exodus of cryptocurrency companies and projects from the United States. For example, most Initial Token Offerings (ICOs) today are not open to US citizens. Several trading platforms, such as Poloniex and Bittrex, also chose to withdraw from the US market after paying millions of dollars in fines. In addition, certain Tokens recognized by the SEC as securities will cause the trading platform to remove these Tokens, thereby affecting investors.
And the strict cryptocurrency rules implemented by the SEC not only affect 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 compromised innovation and reduced cryptocurrency adoption among sectors that need it most, such as the unbanked.
The U.S. Securities and Exchange Commission has expanded the definition of “dealer,” causing concern among DeFi participants and the broader crypto community. On the one hand, this new definition may impose a considerable regulatory burden on entities within the crypto industry, potentially slowing down innovation and complicating compliance efforts; on the other hand, as far as cryptocurrency companies are concerned, they need to follow Complex rules, audits and prohibitive numbers as they need to pay compliance costs if they want to enter the US market. Consider the example of BN, whose CEO, Changpeng Zhao, pleaded guilty in November 2023 to violating U.S. anti-money laundering restrictions, prompting a $4.3 billion settlement between the platform and the U.S. government.
summary
There is no doubt that the SEC’s crypto regulatory landscape will continue to evolve in 2024, and according to relevant reports, the SEC has actually been cautious in formulating new specific rules for cryptocurrencies. To address violations, the Commission currently 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 M of 2002
Dodd-Frank Wall Street Reform and Consumer Protection Act
While the central question in SEC crypto regulation is whether crypto can be classified as a security, the SEC has yet to provide a clear classification for all cryptocurrencies.
SEC Commissioner Hester Peirce stated at the ETHDenver conference on February 29 this year that the current stance of the U.S. investment regulator towards the cryptocurrency industry is an “enforcement-only model” and mainly follows a court-first approach. In her view, only if With clearer regulations, the industry can focus on innovation.
Regardless, achieving the right regulatory balance is a prerequisite for effectively promoting development. Crypto regulation is designed to protect investors from fraudulent schemes and ensure market integrity. For example, by enforcing KYC and AML guidelines, authorities can prevent the misuse 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, over-regulation could undermine the fundamental tenet of cryptocurrencies: decentralization. Cryptocurrencies are designed to operate without central oversight, but if only large companies with deep resources can comply with complex regulations, the cryptocurrency ecosystem may tend toward centralization.
It can only be said that now, both the encryption industry and regulatory agencies are facing complex challenges. When formulating laws, regulatory agencies must not only retain the value of cryptocurrency, retain its ability to innovate and decentralize, but also reduce potential risks to the market. ; The encryption industry needs to promote market innovation and development without violating the principles of legality and compliance.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "Deep Wave TechFlow"
Original author: Huohuo, Vernacular Blockchain
