Last year, Securities and Exchange Commission chair Gary Gensler vowed that the regulator would be the “cop on the beat” policing the “Wild West” of the cryptocurrency industry. The SEC would go on to file dozens of civil lawsuits against some of the sector’s largest players, including exchanges Binance and Coinbase and leading crypto lenders Genesis and Celsius.
But the headlines in 2023 were stolen by another arm of the US government, as the Department of Justice swooped in with high-profile criminal prosecutions that produced rapid resolutions.
In less than 12 months, prosecutors had won the conviction of FTX’s Sam Bankman-Fried — who faces potentially decades behind bars — and dethroned Changpeng Zhao, or CZ, the former head of Binance.
“You always get people’s attention when other executives in the industry are rolling up their sleeves to be fingerprinted,” said Widge Devaney, a former federal prosecutor now at law firm Baker McKenzie. “It is a lot more real than whether something is a security or not,” he added, referring to the SEC’s ongoing battle to get courts to define the status of various tokens.
“The DoJ has led the way in defining the boundaries of the crypto industry,” said another former senior prosecutor, who asked not to be named, “and in some respects it reflects a missed opportunity for the SEC”.
Many of the justice department’s high-profile crypto indictments have been accompanied by parallel complaints by the SEC. Both have brought cases against Alex Mashinsky, the former head of Celsius, and Do Kwon, the Korean mastermind behind the TerraUSD and Luna tokens, alongside lesser-known crypto personalities.
The SEC scored a big legal win this week when a US federal judge found that the digital assets at the heart of its case against collapsed stablecoin operator Terraform Labs and its chief executive Kwon qualify as securities. A Terraform spokesperson said it “strongly” disagreed with the decision and that the tokens were not securities.
But some of the SEC’s flagship enforcement actions have been stuck in a legal quagmire, with competing rulings by judges in the same New York federal court as to whether various crypto assets are indeed securities, and thus under the agency’s jurisdiction.
The SEC’s cases against Binance and Coinbase have been challenged by the defendants in a series of pre-trial motions. The regulator last month chose not to join a settlement between the DoJ, other agencies and Binance, instead continuing its fight to determine that tokens traded on the exchange qualify as securities.
A final verdict is likely to face an appeal to higher courts. “The big players are not settling,” according to one senior white-collar lawyer who is working on several large crypto cases in the US. As is often the case with civil actions, “the SEC cases are just taking a long time to litigate”, he added.
The SEC has, however, reached settlements with several defendants, including cryptocurrency exchanges Kraken and Bittrex as well as several celebrities involved in digital assets.
Since taking office in 2021, Gensler has adopted a tough stance against the crypto sector, within which he says non-compliance and wrongdoing are pervasive. The SEC has brought a broad range of cases during his tenure, alleging everything from fraud to failure to register as an exchange and celebrities not disclosing the payments they received for promoting crypto.
“We are not afraid to litigate matters, whether against the best-resourced founders, the oldest firms, the newest industries, and yes, the largest crypto exchanges,” Gensler has said.
The SEC chief has also repeatedly argued existing securities laws are sufficiently clear and new rules specifically focused on digital assets are not necessary. Gensler has said that other SEC measures already apply to crypto, and that while there is widespread misconduct in the sector, crypto accounts for a small portion of the multitrillion-dollar US capital markets.
Yet while the SEC “have taken their shots on the big [crypto] targets”, it is now “facing some uphill sledding”, said Kayvan Sadeghi, who leads Jenner & Block’s blockchain practice in New York.
In July, a judge in Manhattan ruled that XRP, a token offered by Ripple, was not de facto a security when sold to retail investors, but was subject to the SEC’s registration requirements when bought by institutional investors. She subsequently denied the regulator’s request to immediately appeal against the decision. In August, the SEC lost its attempt to prevent the launch of a US-listed spot-bitcoin fund by asset management firm Grayscale, which an appeals court called “arbitrary and capricious”.
As a result of such decisions, “there is more optimism on the regulatory front [in the crypto industry] than I think there might have been for a while”, said Rob Cohen, a former senior SEC enforcement official now at Davis Polk.
Meanwhile, the DoJ is doubling down. “We plan to . . . continue to target malign actors, money launderers, fraudsters, executives and corporations who use cryptocurrency to commit their crimes,” Nicole Argentieri, acting assistant attorney-general at the criminal division, told the Financial Times.
The US attorney’s office in the Southern District of New York, which brought several of the large crypto criminal cases in 2023, said its leader Damian Williams’s message to the industry’s bad actors remained the same as it was when he first announced the indictment of Bankman- Fried: “I would strongly encourage you to come see us before we come see you.”
Still, Gensler remains public enemy number one for the crypto lobby in Washington. Kristin Smith, chief executive at the Blockchain Association, said that while the DoJ had “targeted individuals and businesses where the issues in question were relatively clear cut and have focused on bad actors”, the SEC “has decided to pursue a punitive campaign against the cryptocurrency industry through enforcement actions, rather than issuing clear guidance on core issues that impact that industry”.
Ilan Graff, a former prosecutor in New York now at Fried Frank, said forthcoming SEC actions over allegedly unlicensed exchanges could “loom less large, but may in some ways be more important for defining the future of the [crypto] industry”.
Optimism in the broader crypto sector has sent the price of bitcoin, the most actively traded cryptocurrency, to a 20-month high of $44,000, while the price of competitors including ethereum and dogecoin have also soared.
However, those seeking regulatory clarification will be kept waiting, said Jordan Goldstein, a partner at Selendy Gay Elsberg, which has represented plaintiffs suing several large cryptocurrency companies. Given the court schedules for high-profile SEC crypto cases, he said, “it feels like we are two or three years out before we have resolution on a number of these issues”.
