Legal victories and regulatory losses marked a busy year for the crypto industry in the regulatory and policy front.
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For cryptocurrencies, 2023 was neither the best nor the worst of times. The overall market doubled, to $1.7 trillion though that was still a far cry from its $3 trillion zenith in 2021. Even as prices recovered, however, the industry found itself in the crosshairs of lawmakers and regulators, the latter led by the U.S. Securities and Exchange Commission. The year offered a smorgasbord of crises for crypto, including criminal cases involving the heads of some of its biggest companies, enforcement actions that called into question the legitimacy of much of the blockchain business and only limited progress in getting legislative clarity from the U.S. Congress.
In all, there was “hesitancy in building because of the regulatory uncertainty” throughout the year, says Marisa Coppel, head of legal at the Blockchain Association. Still, there were a few notable victories for the industry in court, and spot-market exchange-traded bitcoin funds may be just around the corner in the U.S., offering access to a large pool of investors and holding out the hope for wider acceptance of digital assets.
Battles in Court and on Capitol Hill
It was “the year of the exchange reckoning” in U.S. courts, says Sheila Warren, CEO of the Crypto Council for Innovation industry group.
The SEC brought cases against five crypto exchanges in 2023, including Coinbase
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Based on a Supreme Court ruling in a 1946 case involving Florida citrus groves, the Howey Test is used to determine if something qualifies as a security, and would thus fall under the agency’s oversight. If an asset is based on a transaction that includes an investment of money in a common enterprise with the expectation of profit to be derived from the labor of others, then it qualifies as an investment contract under Howey. Sell that contract to an investor and it is a security and subject to the Securities Act of 1933 and the Securities Exchange Act of 1934.
At the time of filing its cases against Coinbase and Binance, the agency alleged that over $37 billion worth of cryptocurrencies were securities.
But a July 14 federal court ruling on a separate SEC case against Ripple Labs, promoter of the xrp token ($33 billion market cap), found that the sale of that cryptocurrency was a security only when it was sold to investors, not retail traders.
“It marked a shift in how courts and the amount of difference they’re giving to agencies, especially the SEC,” says Coppel of the ruling, which for now is not binding outside of the federal district court for Southern New York and is also not necessarily applicable to other tokens .
The SEC’s suits against Ripple, Binance and Coinbase are still in their pre-trial phases. The earliest development could come from a different Coinbase action, under which the exchange is seeking to compel the SEC to provide rules tailored for the crypto industry that would allow it to do business. The agency refused to respond to the request at all, but Coinbase won a court ruling that led the SEC to deny the company’s petition, and oral arguments in the next round of the case are scheduled for January 17.
Congress could resolve the issue by enacting laws to cover crypto trading, but so far it has been unable to do so. A market-structure bill co-sponsored by House Agriculture Committee Chair Glenn Thompson (R-Pa. ), and House Financial Services Committee Chair Patrick McHenry (R- N.C.) made it out of committee for consideration by the full chamber and has some industry backing, but it is still a long way from being passed by both houses.
Not all industry participants agree that new legislation is needed. Nathan McCauley, CEO of crypto custodian Anchorage Digital, says that existing financial regulations are already “pretty instructive. “The custody rule is clear, the segregation of responsibilities is clear,” he adds. “You can run and operate a business pretty well under the existing set of regulations.” That echoes the SEC’s position, though it is not clear how the industry can operate when cryptocurrency transactions are disallowed.
Elsewhere, several countries passed significant digital-asset legislation, including Europe’s market regulations in crypto assets (MiCa) and the United Kingdom’s Financial Markets and Services Act (FMSA). Those actions provide specific crypto rules that both adapt traditional finance regulations to entities interacting with digital assets, and they recognize new assets, like stablecoins, as their own financial classes.
Behind Bars
While bankruptcy filings were the focus the previous year, 2023 saw the action shifting to criminal court. The U.S. government charged over 25 crypto-related executives from securities fraud to market manipulation, headlined by successful prosecutions of the heads of two of the highest-profile exchanges in the world, Sam Bankman-Fried of FTX and Changpeng Zhao of Binance.
“It’s been an unbelievable year of telenovela drama,” says CCI’s Warren.
Following the very public collapse of FTX in November 2022, its founder and former CEO was charged with seven counts of fraud, embezzlement and criminal conspiracy in February. After a six-week trial and a speedy four-hours of jury deliberation, Bankman-Fried was convicted on all counts. His sentencing hearing is set for March 28, and he faces up to 110 years in prison.
Regulators and enforcement agencies also came knocking at the door of Binance, the largest crypto-exchange in the world. Already facing civil charges by the Commodities Futures Trading Commission and the SEC, Binance was taken to task by the the Justice Depatment. On November 21, Zhao, who is widely known as CZ, agreed to step down as the exchange’s top executive as part of a $4.3 billion settlement. He and the company admitted Binance engaged in unlicensed money transmitting, violated sanctions and breached anti-money-laundering regulations.
Meanwhile, a criminal case involving crypto mixer Tornado Cash threatens precepts of decentralization, a key principle for many digital-asset proponent. One year after the Treasury Department sanctioned the mixer, which anonymizes public Ethereum
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The SEC also cracked down on companies selling non-fungible tokens (NFTs) as securities, charging two collections, Impact Theory and Stoner Cats. Without admitting or denying the charges, both companies agreed to settle with the regulator, paying respective penalties of $6.1 million and $1 million.
Dates to Watch in 2024
The approval of a bitcoin spot ETF is top of mind for institutional and retail investors alike. Asset managers have reportedly been meeting with SEC officials to review and edit their applications, going so far as discussing ticker symbols for the hoped-for funds. A decision is likely by January 10, and it could cover about a dozen new funds. The SEC has steadfastly refused to list ETFs based on the spot price of bitcoin, which it has insisted is too subject to manipulation, even though it allows similar funds based on bitcoin futures, which reflect cash-market levels.
On the criminal front, 2024 is likely to bring developments in cases against leading crypto executives, particularly those at the center of the fall of the market in 2022.
Alex Mashinsky, former CEO of the bankrupt crypto lender Celsius, was charged in July with securities and commodities fraud, wire fraud, and conspiracy to manipulate the value of the celsius token. He could face decades in prison if convicted. The trial has been set for September 17, with preliminary hearings starting as soon as March.
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“Big media moments are behind us now, so it’s about the nitty gritty” regulations and policies, says CCI’s Warren.
And then there’s the question of a new legal framework for crypto. Blockchain advocacy groups like the Blockchain Association and the Crypto Council for Innovation are hopeful legislation will advance in the new year. But against the backdrop of a presidential election that is generating court cases and discord of its own, blockchain issues may not make much headway.
“Regulation is likely to come from the states,” adds CCI’s Warren, pointing to bills wending through the New York and California state legislatures.
