SEC Continues Crypto Crackdown Despite Recent Losses

The Securities and Exchange Commission (SEC) has faced significant legal challenges recently, including a court sanction in Utah. However, opinions vary on whether the regulator is losing its broader battle to classify most cryptocurrencies as securities.

When Gary Gensler became SEC chairman in 2021, he clearly intended to crack down on the crypto industry. Despite hopes he might be more lenient due to his background as a banker and blockchain instructor at MIT, Gensler quickly showed skepticism towards crypto. During his tenure, the SEC has filed numerous lawsuits against major players like Coinbase, Binance, and Terraform Labs. While the SEC has won or settled several cases, Gensler’s broader theory that nearly every token except Bitcoin is under his jurisdiction has faced challenges.

Recently, the SEC dropped its investigation into the Paxos-issued, Binance-branded BUSD stablecoin. James Murphy, a lawyer from MetaManLaw, explained, “The idea that a stablecoin is itself a security is ridiculous. Judge Jackson confirmed that BUSD specifically is not a security, so it makes sense the SEC would drop the case against Paxos.”

Here are some notable SEC losses:

Bitcoin ETFs: The SEC has long opposed approving spot bitcoin exchange-traded funds (ETFs). However, in January, a Washington D.C. appeals court forced the SEC to approve these funds, calling its previous attempts “arbitrary and capricious.” Since then, spot bitcoin ETFs have seen net inflows of $15.27 billion, and the SEC is moving towards approving Ethereum ETFs as well.

Ripple, XRP, and Securities Law: The SEC’s legal battle against Ripple Labs began before Gensler’s tenure but has mostly unfolded under his leadership. District Judge Analisa Torres ruled that while Ripple’s institutional sales of XRP were unregistered securities, secondary sales were not. This contradicts Gensler’s stance that most crypto tokens are securities. Austin Campbell, a Columbia Business School professor, noted, “The SEC is losing the fight to create ‘crypto asset securities’ out of thin air, as courts are slapping them down.”

Staff Accounting Bulletin 121: This accounting rule became contentious in Congress, with both the House and Senate voting to repeal it. Although they failed to override President Biden’s veto, the political fight damaged the SEC’s reputation. The Government Accountability Office criticized the SEC for imposing the rule without proper congressional review, and it faced opposition from the banking industry due to strict capital requirements.

D.E.B.T. Box: The SEC’s lawsuit against crypto startup D.E.B.T. Box was marred by false statements. In March, Utah District Court Judge Robert Shelby criticized the SEC, leading to the case being dismissed and the SEC paying $1.8 million in legal fees. Two SEC agents resigned, and the SEC’s Salt Lake Regional Office was closed.

Despite these setbacks, the SEC has secured several recent victories that could shape future policies. Many successful enforcement actions go unnoticed, often because they involve smaller firms. For instance, the SEC settled three crypto-related cases this year, including those involving Rockwell Capital Management, ShapeShift, and TradeStation. Additionally, the SEC charged 17 individuals in a $300 million Ponzi scheme.

The SEC’s persistence was evident in its case against Coinbase. Although Coinbase attempted to dismiss all charges, it largely failed. Judge Faila allowed the SEC to sue over Coinbase’s staking program and acknowledged that initial coin offerings could involve securities offerings. A similar situation occurred in the SEC’s case against Binance.

Molly White, author of the crypto-critical Web3IsGoingGreat blog, remarked, “The SEC still aggressively pursues crypto-related cases. Not every investigation will lead to enforcement.”

Bitfinex’d, a pseudonymous critic, likened expecting the SEC to win every case to expecting “traffic cops to shut down gang warfare.” James Wester from Javelin Strategy and Research noted, “Winning against the SEC still incurs high costs and diverts companies from more valuable efforts. The process itself becomes the punishment.”

Despite occasional crypto victories, the SEC remains relentless, targeting major firms like Coinbase, Uniswap, and Consensys. This aggressive stance signals that no part of the crypto industry is safe from scrutiny. While the crypto sector may win some battles, it faces an uphill struggle against the SEC’s determined efforts. This dynamic might change with a new administration in the White House in 2025.