February Has Been "Hard" on Crypto, What Can We Learn from SEC's Recent Moves?

In the absence of digital asset legislation, the US Securities and Exchange Commission (SEC) continues to regulate the crypto industry through enforcement actions to ensure compliance. Since February of this year, as covered by Fazzaco, the SEC has taken two significant actions relating to cryptocurrencies.

On February 16th, a proposal was passed by a five-person group within the SEC with a 4-1 vote in favor​, which may increase the difficulty for cryptocurrency companies to operate as digital asset custodians in the future. The day before, Chairman Gary Gensler suggested that the proposal called for amendments to the 2009 custody rules that would apply to custodians of all assets, including cryptocurrencies.

​SEC Continues Regulating Crypto Assets with Law Enforcement

On February 9, the SEC charged Payward Ventures, Inc. and Payward Trading Ltd. with offering their crypto asset lending service without registration​. In the offerings, investors transferred their crypto assets to Kraken for lending in exchange for an advertised annual investment return of up to 21%. Kraken subsequently agreed to a settlement, paying a $30M fine and immediately ceasing to offer unregistered crypto lending services in the US, and agreed to permanently stop pledging business in the US.

However, SEC Commissioner Hester Peirce stated that in the absence of guidance, companies find it difficult to make wise registration decisions, so he opposed the generalization of registration for crypto exchanges and platforms. Industry leaders also hold similar views. Coinbase's CEO Brian Armstrong and Chief Legal Officer Paul Grewal, as well as Kraken's Chairman Jesse Powell, all opposed SEC’s move and believed that there are currently no appropriate registration procedures.

Shortly thereafter, on February 12, SEC notified Wells Trust Co that it plans to sue the company for violating investor protection laws, alleging that the stablecoin Binance USD (BUSD) issued by Paxos is an unregistered security​. Although the SEC has not explicitly stated that it will take enforcement action, what they did has demonstrated the regulator's attitude towards the digital asset industry.

SEC Chairman Gary Gensler pointed out in an interview that compliance issues for crypto exchanges and platforms need attention. Exchanges and platforms need to distinguish business functions and register them separately. Companies need to disclose information to make it clear to retail investors how they handle token deposits. Whatever the label, economic benefits are important. Investors are putting their money into a platform and getting returns, and the law requires them to disclose, and the company needs to register.

The lack of clear legislative regulations in the crypto community also makes the future uncertain.

What Can We Learn from SEC's Moves

The recent regulatory actions taken by the SEC in the crypto industry have garnered widespread attention. From various statements and actions, some implications can be inferred. Firstly, any centralized or decentralized exchange and other digital asset businesses that engage in interest-bearing accounts, products or services involving crypto assets should be aware of SEC's regulatory scope and compliance requirements to avoid future administrative and judicial actions.

Secondly, as litigation procedures and settlements between companies and regulatory bodies will have long-term implications for the crypto market, industry leaders may choose to confront regulators in court rather than settling.

Thirdly, companies that issue and trade unregistered stablecoins should anticipate SEC action. SEC Chairman Gensler has explicitly stated that stablecoins should be considered securities and must comply with disclosure and registration requirements stipulated by securities laws. He also called on crypto exchanges and platforms to register and disclose information as required to safeguard investor interests and market stability. The lack of clear crypto legislation means its future remains uncertain, but regulatory enforcement actions have sent a clear signal to the market: companies that violate regulations will face serious consequences.

Meanwhile, recent macroeconomic data shows that inflation pressures continue to exist. US retail (RPI) and producer price indices (PPI) remain higher than expected, and although cryptocurrencies have maintained some growth, the stock market has been declining.

Final Thoughts

Although the SEC's guidance is broad, vague, and possibly incomplete, its actions remain consistent. Therefore, the crypto industry should pay closer attention to regulatory policies to avoid non-compliance and reduce the risk of being fined or penalized by regulators. The crypto industry needs to work harder to ensure compliance in its operations to maintain market stability and development.