Crypto this, crypto that. Cryptocurrencies have made a huge rise in recent years, but what does the SEC have against crypto companies? 

The Securities and Exchange Commission (SEC) has cracked down on cryptocurrency operations on the back of a crypto market crash that has wiped out investors’ wealth and cast doubt on the future of firms operating in this space. The worries (among many) are that stablecoins, which are pegged to EUR, GBP or USD, are not so stable after all, and that crypto trading platforms have no protections in place for investors should they collapse. Since there aren’t many regulations in place, cryptocurrencies are experimenting and growing quickly, but this rapid growth comes with risky practices that can leave consumers exposed.  

The SEC has a bone to pick with crypto companies

Crypto exchanges have faced increasing scrutiny in the past months. The US Treasury has warned in reports that cryptocurrencies, if not properly regulated, pose a risk for consumers, investors and businesses. The reports also state that the SEC and Commodity Futures Trading Commission (CFTC) must launch investigations and enforce actions against crypto companies that do not comply with laws. The Treasury says that the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) should increase efforts to monitor consumer complaints and take action against deceptive or unfair practices. 

What is the future of crypto regulations?

Cryptocurrencies aren’t governed by a single regulatory authority. The CFTC considers Bitcoin a commodity while the SEC allows traders to bet on the value of bitcoin through CME’s bitcoin futures contract. The IRS regards Bitcoin as property for tax purposes. 

The CFTC, whose enforcement summary for fiscal year 2022 reported that over 20% of its 82 actions were related to cryptocurrency, could become the chief regulator of cryptocurrency. That said, the SEC’s influence in regulating the US crypto market cannot be undermined. In September, SEC Chair Gary Gensler said that the agency would take the lead in regulating the crypto market by monitoring crypto tokens and intermediaries. He also appeared to suggest in a lawsuit that the SEC would assert jurisdiction over the entire Ethereum network. 

Can the SEC also regulate Initial Coin Offerings (ICOs)?

ICOs are to cryptocurrencies what initial public offerings (IPOs) are to shares. Gensler has deemed ICOs unregistered securities falling within the purview of securities laws. In 2021, ICOs accounted for 70% of the total of 20 enforcement actions related to crypto brought by the SEC.  

What does the crypto community think?

The main attraction of blockchain is that it’s used in a decentralized way. So, it’s not surprising that the crypto community isn’t in favor of cryptocurrency regulations. There are concerns that regulations, if enforced, will not be enforced fairly and that excessive regulation may have the opposite effect of making crypto more risky. Already, decentralized finance (DeFi) built on the blockchain are considered safer and more transparent than traditional financial instruments.

Those in favor of cryptocurrency regulation say it would prevent market manipulation and price volatility, thereby protecting investors, while also highlighting the technological and cybersecurity risks associated with crypto trading platforms. As cryptocurrencies are vulnerable to money laundering, regulations would also keep criminal activity in check. 

Whether a legal framework for cryptocurrency is coming next year is anyone’s guess. Whatever governments decide, they should consider the potential economic benefits of virtual currencies in managing risks.