For two years now, crypto businesses in the United States have faced an uphill battle from the SEC. In its drive to regulate financial markets, the SEC has put in place several tough, sometimes unwelcome rules that have forced some companies to suspend operations, while others are seriously considering tax exile. This regulatory frenzy raises legitimate questions: what are the SEC’s true intentions towards cryptocurrencies? Why such an obsession with this sector in particular?
SEC vs cryptocurrency: the underside of a long-standing battle
The SEC is an entity that does not go unnoticed in the crypto world. In fact, it has become a go-to acronym in the industry, so much so that even newcomers may confuse it with a “shitcoin” or a memecoin.
Although its mission is to protect investors, the actions of the SEC often have a significant impact, whether legitimate or not. However, it is natural to wonder why the SEC is so focused on cryptos. What is the precise role of the SEC in its regulation?
Before getting to the heart of the matter, it should be remembered that the SEC came into existence in 1934, following the stock market crash of 1929. Its primary role is to protect investors by regulating financial markets. In other words, the SEC is like a financial detective that closely monitors the activities of publicly traded companies, as well as those of brokers and investment advisers.
However, the world of cryptocurrencies is very complex and presents significant regulatory challenges. In this context, the SEC has put in place a series of rules and regulations to oversee the activities of companies in the field. Among these regulations, the famous “Howey test”. The latter is used to determine whether a transaction is an investment contract or a security.
However, this approach has drawn much criticism for its excessive rigor which has often harmed businesses and exchanges. Ripple is an iconic case that has carried the torch in this fight against the SEC since 2020. Its victory in the ongoing lawsuit against the SEC could pave the way for better understanding and regulation of the entire crypto industry.
The SEC, what is it?
The Securities and Exchange Commission (SEC) is an independent administrative authority that oversees US financial markets. It is responsible for maintaining the stability and integrity of the market, as well as protecting investors from “claws of financial sharks”.
The SEC also makes sure that companies follow rules and regulations. And takes action in case of violation.
In addition, the SEC must also facilitate capital formation, encouraging companies to raise funds in the financial markets with safety and confidence.
As you will probably have understood, the scope of the SEC is therefore not limited only to cryptos. It goes beyond. But why such an obsession with cryptos?
Why only cryptos?
Well, after being rocked by several scandals in the crypto industry last year, it was time for the regulator to take tougher action. The Terra scandal, which caused a loss of nearly $40 billion, was the spark that ignited this obsession. Companies associated with Terra Luna have been targeted by the SEC.
But the recent fall of FTX was the perfect opportunity for the SEC to show its zeal for cryptos. Looks like the SEC took the opportunity to declare a witch hunt. She inflicted massive fines and sent Wells Notices. In January 2022, the Chairman of the SEC had alert the Exchanges of his probable crusade. However, no one could imagine that she would take such a frenzy. As you can read the statement from the SEC boss.
“I have asked staff to consider all means of bringing these platforms within the scope of investor protection. If trading platforms do not enter the regulated space, it would be another year of public vulnerability,” he said.
Statement by Gary Gensler
The SEC has always considered the rise of cryptocurrencies to be a new risk for investors. Thus, in January 2022, it had therefore taken more than 80 measures against unregulated virtual asset platforms.
However, the legal uncertainty surrounding the classification of cryptocurrencies as securities or commodities complicates the regulation of these assets, creating difficulties for companies operating in the cryptocurrency sector.
The SEC’s Obsession with Cryptos: A Threat to Financial Innovation?
The SEC has recently taken crackdowns on several companies, leaving victims in its wake. An obvious example of this crackdown is the requirement for Paxos to cease issuance of Binance’s stablecoin (BUSD).
In addition, the fine imposed on Kraken and the obligation to suspend its staking activities is a measure considered excessive by many market participants.
Currently, Coinbase is also in the spotlight. The latest warning issued to Coinbase for violating securities laws sends a strong signal to the entire crypto industry. This case could lead to legal consequences and stricter regulation for the entire sector.
However, more and more crypto industry players, as well as some members of the SEC, are questioning the regulator’s controversial decisions. There is currently a protest movement forming within the crypto ecosystem. He points out the limitations of the SEC and calls for a review of its policies.
Obey or rebel?
Crypto businesses face a tough spot as the Securities Exchange Commission (SEC) continues its offensive against all crypto entities in the United States, including pro-crypto banks.
Despite receiving a Wells notice from the SEC on March 22, Coinbase does not intend to be intimidated. The company even announced on Twitter that it would resume staking activities, no matter what. Coinbase is convinced that it is within its rights and is ready to defend its company in court against the SEC.
The war waged by Gary Gensler and his team risks jeopardizing the skills behind technological innovation, which is unfortunate. Other countries, such as Hong Kong and El Salvador, have adopted a very favorable attitude towards tech companies. They could represent attractive alternatives for crypto businesses seeking refuge from this situation.
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