Cryptocurrencies have grown from a whitepaper proposal to a $1 trillion asset class over the past decade. But unfortunately, the market is overrun with fraudulent initial coin offerings (ICOs) and devastating hacks, leaving customers with millions in lost funds. So, not surprisingly, the Securities and Exchange Commission (SEC) and other regulators have taken notice.
This article examines the SEC’s enforcement actions targeting crypto assets and how future regulations will likely play out.
What Are Enforcement Actions?
The SEC files civil enforcement actions to prevent individuals from further violating securities laws, recover funds from illegal conduct, and in some circumstances, exact civil penalties. While the SEC’s powers only include civil lawsuits, the agency can refer a case to the Justice Department or other bodies capable of criminal prosecution.
Between July 2013 and March 2023, the SEC had more than 100 civil enforcement actions involving crypto assets. These cases span everything from Kim Kardashian touting crypto assets on social media without disclosing payments she received to allegations that BlockFi failed to register its retail crypto lending product.
Notably, the agency had even more crypto-related enforcement actions covering market manipulation, false tweets, fake websites, insider tracking, cybersecurity breaches, public company disclosures, and other events. While these didn’t directly involve crypto assets, they involved individuals or companies working with crypto or in the space.
The SEC’s ‘Shadow Crypto Rule’
The SEC’s growing stockpile of enforcement actions paints a picture of how it defines crypto securities and exchanges – what CoinDesk terms a “shadow crypto rule.” While the industry wants regulators to issue actual rules, Commissioner Gary Gensler insists existing laws are straightforward and don’t require clarification.
In its enforcement actions, the SEC relies on the “Howey Test” to determine if a token is a security. The test refers to a U.S. Supreme Court case defining an investment contract. In short, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Ultimately, the SEC’s lawsuit against Ripple will determine if the Howey Test applies to crypto tokens. The agency sued Ripple Labs in December 2020, and the case remains in federal court. Ripple’s lawyers argue that SEC’s previous stance that Bitcoin and Ether were not securities (Hinman) shows the agency has no clear definition.
The SEC is targeting unregistered crypto exchanges. In 2021, it sued Poloniex and secured a $10 million settlement. The move illustrates the SEC’s desire to force digital trading platforms to register as national exchanges.
2023 SEC Enforcement Actions
The SEC has had more than 100 crypto-related enforcement actions since 2013. In addition to crypto assets, these enforcement actions for account intrusions, insider trading, market manipulation, cybersecurity controls, public company disclosures, and trading suspensions
The crypto asset enforcement actions occurring this year include:
The SEC maintains a complete list of historical enforcement actions against crypto assets on its website: https://www.sec.gov/spotlight/cybersecurity-enforcement-actions.
The Bottom Line
The crypto industry is the Wild Wild West of modern financial markets, but that could change as the SEC looks to regulate the industry. With over ten crypto asset enforcement actions in 2023 and about 100 earlier actions, the agency is rapidly developing a “crypto shadow rule” governing how it handles crypto exchanges and securities.
It’s also worth noting that the SEC isn’t the only agency focused on crypto enforcement. The IRS and CFTC have some jurisdiction over crypto-related regulations. For instance, the IRS handles the taxation of crypto assets (as property), and the CFTC regulates crypto exchanges involved in cross-border interstate transactions.
If you trade crypto assets, ZenLedger can help you aggregate transactions across wallets and exchanges, compute your capital gain or loss, and generate the tax forms you need each year. You can even identify ways to harvest tax losses on an ongoing basis and integrate with TurboTax to streamline your tax preparation process.
This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.