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“It’s about compliance,” SEC Chairman Gensler said in an interview a few days ago while discussing the SEC’s broad crypto enforcement strategy. “There are so many non-compliances in this area. It’s part of the business model.”
After the demise of FTX, the SEC, a former darling of the trillion-dollar market, has found a new foothold to curb cryptocurrencies. Calls for tougher law enforcement are growing on Washington and Wall Street. Congress just gave the agency more funding. And a court victory in the second half of 2022 SEC Views Crypto Tokens Can Be Securities – Subject To Strict Regulation – Even If Not Publicly Sold Through Initial Coin Offerings.
The SEC’s campaign for compliance could increase regulatory authority over cryptos. You will usher in a new era of police in what Gensler called the “Wild West” market. It will also allay the concerns of progressive advocates and lawmakers who want government agencies to act more quickly and aggressively to protect consumers and investors.
However, crypto companies are poised to resist SEC oversight, setting up one of the most important battles of the Gensler era.
Coinbase CEO Brian Armstrong has accused regulators of acting “very sketchy” after they effectively blocked the launch of a lending product. Terraform Labs founder and now-crypto fugitive Do Kwon has been serving SEC subpoenas for months through court challenges, including an unsuccessful appeal to the U.S. Supreme Court. retreated over
And in the latest case, Gemini co-founder Tyler Winklevoss called the SEC charges against Gemini and Genesis “totally counterproductive.” Gemini and other creditors are “working hard” to recover nearly $1 billion in frozen client assets on a crypto lending platform that the SEC claims should have been registered with the agency he said. In a tweet, Winklevoss wrote that Gemini is looking forward to protecting itself “from this manufactured parking ticket.”
The industry has allies in Congress too.
House Republicans have listed Gensler on top of their watch list, questioning him about his work in the crypto space. And this year’s Congress is likely to discuss legislation dealing with the SEC’s role in emerging industries.
At the root of the industry’s frustration with the SEC, often conveyed through a mixture of conspiracy theories, disdain and Twitter trolling, is a fundamental disagreement with the SEC’s authority in the market.
Since the days of the Trump administration, the SEC has argued that much of the cryptocurrency market is already under its jurisdiction as securities and is usually unregistered. Using the “Howey test,” which assesses eligibility as an investment contract, SEC officials, including Gensler and former chairman Jay Clayton, believe most tokens are securities and the platforms that carry them score less than they should. should be treated as such.
But crypto executives say the reality is not so black and white. For example, the uses and characteristics of tokens may change over time. The SEC has also never identified the broad range of tokens it considers to be securities, except in a few instances, and has never provided a clear path as to how companies should register with the SEC, they said. say.
“We now have decades of precedent, speeches by certain SEC commissioners, and little more than that,” said Coinbase Chief Legal Officer Paul Grewal. Proper guidance is needed to thrive and, most importantly, to protect investors.”
But under Gensler, the SEC has already filed dozens of different cryptocurrency lawsuits. The agency’s existing authority was recently confirmed in a lawsuit against blockchain-based public platform LBRY. The agency claimed it failed to register the LBC token as a security in 2021. A U.S. judge upheld his SEC in his November ruling, warning LBRY CEO Jeremy Kaufman that it “threats the entire U.S. industry.”
“They’re boiling frogs,” Kaufman said. “Every win they get inspires them to get more.”
Responding to calls for new rules and regulations on cryptocurrencies, Gensler told POLITICO that concerns over lack of regulatory clarity were “false statements.” Fellow Democrat SEC Commissioner Caroline Crenshaw said in a separate interview that if the SEC were to provide guidance that “the security she’s an 8.5 x 11 paper,” suddenly everyone’s paper is 9 x 12. said it would. “
Instead, the SEC wants cryptocurrency brokers to enter the existing securities regulatory regime. Gensler said the agency is having discussions with companies about how to register, and he added that the process includes “unwinding” their business. Crypto companies are often structured as exchanges, broker-dealers, and custodians all rolled into one entity, but each is regulated differently.
Authorities have been encouraging cryptocurrency exchanges to voluntarily register because they want to avoid lawsuits with much of the industry that they believe violates rules, a person familiar with the matter said late last year. .
Gensler said it is “unpredictable” whether companies will get to compliance through proper registration in the first place or through enforcement actions.
“For regulated entities that are fully compliant with our framework, we have at our disposal a wide range of tools to help detect and deter fraud and fraud, including disclosure reviews, inspections and inspections. I can,” said Crenshaw. “If an entity chooses to remain non-compliant, the only real tool we have is enforcement.”
For some time now, there has been increasing pressure on the SEC to take a more aggressive approach to cryptocurrencies, especially against the market’s biggest players.
The Gemini and Genesis cases are subject to further investigation by the SEC, which may alleviate some of these concerns. However, the SEC has previously pursued similar lending products, including one planned by Coinbase and another from now-defunct lending platform BlockFi, which settled the SEC’s claims, so this case is entirely out of the question. It’s nothing new.
Meanwhile, the SEC has revealed that it believes there are exchanges that offer trading in unregistered securities, said former agency attorney Tyler Gellasch, citing Coinbase as an example.
The SEC accused a former Coinbase employee of insider trading in 2022, claiming seven unregistered securities were trading on the exchange at the time. Coinbase denied the allegations.
However, the agency has yet to file a banner lawsuit against Coinbase or any other crypto exchange. There is a risk of loss, said Gellasch, who now heads the Healthy Markets Association, an advocacy group for institutional investors.
“If they’re here to protect investors,” Gerash said, “they have to sue.”
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