As the crypto space continues its exponential growth and creates a niche for itself in the digital finance sector, it continues to be plagued with regulatory challenges and policy decisions in most countries. Whether it’s India, which imposes a hefty 30% tax on crypto trading, or China and Qatar which have completely banned cryptocurrency, crypto businesses struggle for freedom to operate.
The U.S. government is no exception, as crypto traders accused regulators of an all-out war against crypto innovations.
While some proponents justify law enforcement actions by citing consumer protection, others argue that governments worldwide simply do not want to lose control over people’s money.
An uncertain future of crypto in a nation spells doom for the ecosystem as it deters traders and prospective investors thereby undermining any chances of crypto adoption.
Let’s explore how the U.S. government and regulatory authorities have pursued crypto businesses and how some crypto advocates are preparing to counter this with legal action.
US’s Bank Crisis of 2023 and Crypto as Scapegoat
In 2023, the USA through the SEC carried out the biggest clampdown on the crypto sector. Notably, this was the same time the U.S. banking sector witnessed the disastrous collapse of several banks. Three small-to-midsize U.S. banks failed within a short period: Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank. This led to a sharp decline in global bank stock prices.
After initial skepticism that the collapse was triggered by the relationship between banks and cryptocurrencies, it was found that the turmoil resulted from poor risk management and macroeconomic issues.
Mark Williams, a former Federal Reserve bank examiner, stated, “When you lose depositor confidence, not even the strongest bank can stand up.”
Supporting this, Nellie Liang, the U.S. Treasury Department’s undersecretary for domestic finance, also denied the theory that cryptocurrency had any direct role in the collapse of banks in 2023.
Despite clear signs that cryptocurrency wasn’t behind the banks’ failure, U.S. regulatory authorities allegedly blamed the volatile nature of crypto markets behind the failure in the banking sector. Crypto enthusiasts across the globe cried foul at the accusations.
SEC Sued Two Major Crypto Exchanges Within 72 Years
After the Bank crisis in March, the Security and Exchange Commission took legal action against two of the biggest crypto exchanges–Binance and Coinbase.
In the complaint, the regulatory agency accused Binance and its affiliate BAM Trading Services Inc., and founder Changpeng Zhao of 13 charges. This includes unregistered exchanges, broker-dealers, and clearing agencies; misrepresenting trading controls and oversight on the Binance.US platform; and the unregistered offer and sale of securities.
In its complaint against Coinbase, filed on June 6, 2023, the SEC accused the company of violating federal securities laws by operating its trading platform as an unregistered national securities exchange, broker, and clearing agency.
Additionally, the SEC claimed that Coinbase conducted unregistered securities offerings through its staking-as-a-service program. The SEC also alleged that Coinbase’s activities lacked significant investor protections like proper disclosures, conflict-of-interest safeguards, and routine inspections by the SEC.
SEC Declare Ether Security
In another turn of events, SEC Chairman Gary Gensler’s notable statement came out during a court hearing, declaring, ‘Everything else other than Bitcoin is a security.
This statement shook the crypto community as it made clear how the U.S. government and regulatory authorities intend to regulate the crypto market.
Shockingly, some U.S. companies revealed that the SEC has launched an aggressive campaign to classify Ethereum (ETH) as a security. These companies have stated that they have received subpoenas supporting their claim.
The latest development could lead to another setback for the crypto industry’s hopes of obtaining the agency’s approval for Ethereum ETF applications from BlackRock and other firms.
Gary Gensler has actively pushed for regulating the cryptocurrency industry, believing that many crypto assets should be classified as securities under U.S. securities laws. His actions include enforcement against major cryptocurrency exchanges like Binance and Coinbase for allegedly offering unregistered securities on their platforms and engaging in activities that should have been registered under securities law.
This stance has led to a series of enforcement actions against various crypto companies and tokens, arguing that they should be registered and follow the rules applicable to securities, including disclosure and investor protection requirements.
In summary, Gensler’s actions aim to apply existing securities laws to the crypto industry, holding entities accountable for their legal obligations and attempting to bring transparency and protection to investors in the rapidly evolving digital asset space.
Tussle Between SEC and Consensys
The dispute between the SEC and Consensys (an Ethereum software company) centers around the classification of Ethereum (ETH) as a security.
According to recent court filings and as detailed in the complaint filed by Consensys, the SEC believes that Ethereum might be an unregistered security, that has been trading out of compliance with federal regulations.
Consensys debated that this stance goes against previous SEC guidance under former SEC Chairman Jay Clayton, which did not classify Ethereum as a security.
Recent court filings indicate that SEC Chairman Gary Gensler and the SEC’s enforcement division have considered Ethereum to be a potential security since 2022, especially after its transition to the proof-of-stake consensus mechanism, known as “Ethereum 2.0.”
The SEC believes that Ethereum’s nature potentially meets the criteria for a security under the Howey Test, which determines what constitutes an investment contract.
Consensys, a company co-founded by Ethereum’s co-founder Joe Lubin, has filed a lawsuit against the SEC. They argue that the SEC’s attempt to classify Ethereum as a security is an “unlawful power grab.”
The company affirms that its operations and business strategy were based on prior regulatory clarity where Ethereum was considered not a security.
The SEC initiated a formal investigation into Ethereum’s status, including issuing subpoenas to Consensys and other firms related to Ethereum. The subpoenas contain detailed information about the company’s role in Ethereum’s transition to proof-of-stake, as well as its acquisitions, holdings, and sales of Ethereum.
Consensys received a Wells notice in April 2023, showing the SEC’s action to file an enforcement action against the firm for acting as an unregistered broker-dealer offering unregistered securities.
The SEC’s scrutiny over Ethereum’s status has raised concerns within the crypto industry. It represents a significant regulatory challenge for the digital asset market, as Ethereum is the second-largest cryptocurrency by market capitalization. Regulatory clarity regarding its status is crucial, given its influence and the number of investors involved.
Consensys seeks to resolve this dispute through the courts, hoping for a clear determination on Ethereum’s regulatory status.
In comparison to a similar kind of case, in which the SEC took action to declare XRP as security, It had completely failed. The court verdict clearly stated that XRP is not security.
Is the U.S. Government Playing a Fair Game?
While the blurry picture of crypto regulations is putting crypto businesses in a dilemma, it is unfair to harass businesses with reckless laws and enforcement actions. As we have previously stated, the SEC sued Binance and Coinbase for selling unregistered securities. However, how can one sue others when there is no clear regulatory framework to follow?
Additionally, every cryptocurrency has a unique mechanism and use cases. In that case, grouping all cryptocurrencies under one category without analyzing their potential is a big blow to crypto innovations.
Certainly, there are lots of malicious practices going around in the crypto sector, but so does in traditional finance! (Do you remember Bernie Madoff’s Ponzi scheme?)
By targeting big companies like Binance and Coinbase, it seems like the SEC wants to curb speculation about crypto trading. While it is true that the crypto space needs regulation, it should be treated with fair and unbiased laws like any other asset class.
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