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SEC Crypto Enforcement Actions in 2023 & Beyond

SEC Crypto Enforcement Actions in 2023 & Beyond

The SEC brought nearly $3 billion worth of enforcement actions in 2023. We break down these lawsuits to understand what happened and what's next for crypto enforcement.

Cryptocurrencies have been a high priority for the Securities and Exchange Commission (SEC), which has brought a total of 173 crypto-related enforcement actions since 2013. In addition to 108 litigations and 65 administrative proceedings, the agency issued 20 trading suspensions and 13 delinquent filing orders, reflecting a broad push to bring the industry in line.

This article examines the agency’s 2023 enforcement actions and what’s coming in 2024.

A Record Increase

The SEC brought nearly $3 billion worth of enforcement actions against crypto-focused companies last year – a 53% year-over-year increase – while locking in more than $280 million in settlements, according to Cornerstone’s SEC Cryptocurrency Enforcement 2023 Update. The increase comes as the SEC doubled the size of its crypto enforcement division.

A Record Increase
Most of the SEC’s actions were litigation and administrative proceedings in 2023. Source: Cornerstone Research

Not surprisingly, the most common actions are fraud (57%) and unregistered securities offerings (61%). But it also brought 46 enforcement actions against initial coin offerings (ICOs) and its first two actions against non-fungible tokens (NFTs), which suggests that it’s targeting a broader range of crypto assets than ever before.

The SEC’s complaint against Stoner Cats alleges that the company’s sale of $8 million worth of NFTs to finance the animated web series amounts to a securities offering. The Director of the SEC’s enforcement division noted that the economics of the offering – not the labels you put on it – determine what’s an investment contract and, therefore, a security.

Much Larger Targets

The SEC is also pursuing much larger targets than in past years. In 2023, the agency brought charges against Coinbase and Binance – two of the world’s largest crypto exchanges. The success or failure of these cases could be the tipping point for the SEC’s fight.

The agency charged Coinbase with operating its crypto platform as an unregulated national securities exchange, broker, and clearing agency. In addition, it alleged that the company failed to register the offer and sale of its crypto asset staking-as-a-service program. That said, Coinbase vigorously defends itself from these allegations in court.

Of course, the SEC went even further with Binance. Regulators alleged the crypto exchange subverted their own controls to secretly allow high-value U.S. customers to continue trading on its Binance.com platform. The agency also accused Binance of commingling customer assets and diverting them as they pleased while misleading investors about non-existent trading controls.

Interestingly, while Binance settled separate legal actions brought by the Treasury Department and Department of Justice, the SEC was not a part of that settlement and continues to push for its own resolution to the case, reflecting its focus on defining what constitutes a “security.”

Where is the SEC’s Focus?

The SEC shifted its focus from individual tokens to trading platforms in 2023 with its high-profile actions against Coinbase and Binance. In particular, the agency lists “examinations of registrants will focus on the offer, sale, recommendation of, advice regarding, trading in, and other activities in crypto assets” as one of its top priorities in 2024.

At the heart of this focus is the implementation of the “Howey Test” – a measure of whether a token is a “security.” The Howey Test defines an investment as a “security” if it involves an investment of money in a common enterprise with the expectations of profit to be derived primarily from the efforts of others.

The SEC alleges that crypto lending and staking products are, in fact, unregistered securities. But Coinbase and other crypto firms insist that crypto tokens don’t meet the definition and accuse the agency of broadening the definition. For example, they cite that the SEC didn’t classify Beanie Babies as securities in the 1990s despite the expectation of profit.

Notably, the crypto industry scored a victory last year when a federal judge found Ripple Labs did not violate federal securities laws by selling its XRP token on public exchanges. While the ruling is specific to Ripple, other crypto firms could use the same argument as a precedent for their own cases defending themselves against the SEC.

What’s Coming in 2024?

The SEC claims that these enforcement actions are “a tool, not a destination,” saying that it prefers market participants to become compliant with rules and regulations. However, some companies have been unsuccessful when asking the SEC for guidance and seeking to comply with federal laws, as Coinbase stated in its response to the SEC’s lawsuit.

The SEC also points to a handful of crypto firms that successfully registered under the existing regime, including CarrierEQ Inc., which sold crypto tokens as unregistered securities, settled with the SEC, and registered their tokens. These case studies highlight a potential pathway to compliance for other ICO issuers under existing rules and regulations.

However, the crypto industry insists that the Howey Test and other securities regulations are outdated. For example, they argue that there’s no expectation of profit based on the efforts of a centralized organization when dealing with decentralized finance (DeFi) platforms. And therefore, their tokens shouldn’t be considered securities.

Beyond the SEC

The SEC continues to work with many partners when delivering enforcement actions, including the Department of Justice, international authorities, and state agencies. And many of these partners are cracking down on the crypto industry in their own way while collaborating with the SEC and others to enforce their agendas.

For example, the IRS hired thousands of new agents over the past year to crack down on tax evasion and close the tax gap while introducing new questions on Form 1040 and other forms. As a result, it has never been more important to ensure that your tax filings are accurate and up to date while maximizing deductions and avoiding overpaying!

Meanwhile, the Treasury Department targets privacy coins and other technologies that enable money laundering and tax evasion. At the same time, it has also taken a keen interest in stablecoins that could introduce systemic financial risks by attempting to replace the dollar as an intermediary in various digital transactions.

The Bottom Line

The SEC continues to bolster its crypto enforcement division with more attorneys, bringing more enforcement actions against crypto firms while targeting larger exchanges. These efforts will likely establish case law around whether a crypto token constitutes security while simultaneously trying to force crypto exchanges to register with the SEC.

If you trade crypto assets, ZenLedger can help you stay tax-efficient and compliant. Our platform automatically aggregates exchanges, computes your capital gain or loss, and generates the tax forms you must file. You can also find ways to save by harvesting tax losses or defending yourself in an audit with a grand unified accounting spreadsheet.

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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.

Justin Kuepper

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