America’s securities and commodities regulators took no pity on the digital asset sector this year, leaving proponents questioning their previous assumptions that one agency was a ‘lighter touch’ than the other.
On Tuesday, the U.S. Securities and Exchange Commission (SEC) released its Enforcement Results for Fiscal Year 2023. Basically, it’s like a Santa story, except SEC chairman Gary Gensler only made a single list of all the naughty ‘crypto’ kids who got lumps of coal in their stockings over the past 12 months.
In overall terms, the SEC filed 784 enforcement actions (+3% from fiscal 2022), including 501 original aka ‘stand-alone’ actions (+8%). There were also 162 ‘follow-on’ administrative proceedings aimed at barring or suspending individuals from participating in certain securities-related activities, plus 121 actions against securities issuers who failed to submit the required SEC paperwork.
In terms of digital assets, the SEC had “another highly productive and impactful year,” including charges filed against a number of “massive crypto frauds,” including Terraform Labs and founder Do Kwon; Richard Heart and his Hex, PulseChain and PulseX scams; plus Sam Bankman-Fried and other FTX-affiliated executives.
The year also saw the SEC target firms like Celsius, Genesis, Gemini, Kraken, and Nexo for offering unregistered securities through lending/staking programs, with the latter two firms each paying eight-figure penalties to resolve their issues.
Non-fungible token (NFT) issuers Impact Theory and Stoner Cats 2 were each charged with conducting illegal unregistered offerings of ‘crypto asset securities,’ marking the SEC’s inaugural actions targeting the NFT sector.
Binance, Bittrex, and Coinbase (NASDAQ: COIN) were each targeted for ‘noncompliance in the crypto asset intermediary space,’ based on their commingling of various services— exchange functions, broker-dealer functions, and custodial and clearing functions—that in other segments of the securities markets are separated from each other.
Finally, the SEC also went after ‘touts’ and ‘influencers’ for unlawfully shilling ‘crypto’ securities without disclosing the compensation they received for flogging such dead horses. The long list of these ‘sponcon’ scallywags included Kim Kardashian, Lindsay Lohan, ex-NBA great Paul Pierce, Jake Paul, Akon, and a whole lot more, with only Soulja Boy and Austin Mahone having yet to reach a settlement with the SEC. (Many of these celebs were shilling on behalf of Justin Sun, who faced his own SEC charges in March.)
Gensler said the 2023 results were proof that the SEC’s willingness to serve as “a cop on the beat” was of great benefit to the investing public. Gensler vowed that the SEC would continue to follow “the facts and the law wherever they lead to hold wrongdoers accountable.”
The SEC also made it rain for individuals making use of its Whistleblower Program, awarding nearly $600 million in total (another new record), including a $279 million payout to a single unidentified fink. (Snitches get riches?) The SEC received a record 18,000+ tips in FY23, around 50% higher than in 2022.
Gary should try giving every Republican $279 million
No SEC chairman proves popular for long on Capitol Hill, but in these hyper-partisan days, the mere fact that Gensler worked on Hillary Clinton’s 2016 presidential campaign has made him particularly persona non grata among Republican members of Congress. Rarely does a week pass without some animated criticism of Gensler’s argument that existing securities laws are perfectly applicable to digital asset firms; thank you very much.
This hostility has increased along with the SEC’s refusal to green-light ‘crypto’ exchange traded funds (ETFs), including applications by some tradfi heavyweights to offer BTC and ETH spot-based ETFs. The SEC has rejected countless such applications, in part due to the ease with which entities such as Binance and Tether can manipulate the fiat price of digital assets. With those two entities still very much calling the shots in Cryptoville, the SEC appears to believe that approving such ETFs is a recipe for disaster.
In fact, BlackRock’s own ETF application from June noted Tether/USDT’s reputation for being “improperly issued without sufficient backing in a way that, when the stablecoin is used to pay for bitcoin, could cause artificial rather than genuine demand for bitcoin, artificially inflating the price of bitcoin.”
Several recent incidents have done little to refute the notion that the sector is ripe for manipulation. Last month, two separate but equally bogus reports that BlackRock’s iShares Bitcoin Trust ETF application was close to being approved by the SEC briefly sent BTC prices soaring. This week, someone impersonating BlackRock filed a bogus entity application for an XRP-based ETF that resulted in that token shooting skyward, albeit only until the entity application was exposed as a fraud.
Perhaps that’s why Wednesday saw the SEC once again extend the deadlines for considering two separate ETF applications. Hashdex had applied to convert its BTC futures-based ETF to a spot-based version, while Digital Currency Group’s (DCG) Grayscale Investments had sought approval for a new ETH futures ETF. As usual, the SEC offered no explanation for its decision.
Last week, Rep. Tom Emmer (R-MN), a longtime ‘crypto’ booster and former SBF fanboy, tore a strip off Gensler on the floor of the House of Representatives. While debating a House appropriations bill, Emmer proposed an amendment to prevent the SEC from taking enforcement action against digital asset firms until Congress passed legislation that specifically empowered the SEC to do so.
However, this and other amendments fell by the wayside when House leadership chose instead to approve a stopgap funding measure that postpones further fiscal debate until January. Given that the dysfunctional House Republican caucus used up three full weeks of the legislative calendar just to choose a new Lord of their Flies, leadership doubted that it had the votes to pass the larger spending plan.
CFTC what you made us do, crypto?
There was a time when the digital asset sector was convinced that the U.S. Commodity Futures Trading Commission (CFTC) would be their perfect regulator, in part due to it having a much smaller enforcement budget than the SEC. This perception as a soft touch didn’t sit well with CFTC chairman Rostin Behnam, and the CFTC’s actions against digital asset operators over the past year may have been the perfect retort.
A week before the SEC released its 2023 post-mortem, the CFTC issued its own FY23 Enforcement Results, which featured “a record setting number of digital asset cases.” Of the 96 total enforcement actions in FY23, nearly half (47) involved “conduct related to digital asset commodities,” compared with 18 out of 82 cases in 2022. The surge in cases led the CFTC to crow that it had “cemented its reputation as a premier enforcement agency in the digital asset space.”
Among the individuals/entities who found themselves in the CFTC’s crosshairs were SBF and other FTX execs, Binance founder Changpeng ‘CZ’ Zhao, Celsius Network’s former CEO Alex Mashinsky, Mango Markets’ Avraham Eisensberg and Cornelius Johannes Steynberg, the former Mirror Trading International scammer against whom the CFTC won a $1.7 billion default judgment, the highest civil monetary penalty in CFTC history.
The CFTC also broke new ground in 2023 by filing the first-ever charges against digital asset operators for willfully evading or attempting to evade provisions of the Commodity Exchange Act (Binance), unlawfully operating as an unregistered commodity pool (Celsius) and winning the first default judgment against a decentralized autonomous organization (Ooki DAO) for unlawfully acting as a futures commission merchant.
The CFTC also got help from insiders making use of its Whistleblower Program, resulting in seven approved applications for whistleblower rewards totaling $16 million. To date, the CFTC has issued 41 such awards worth nearly $350 million.
CFTC Chairman Rostin Behnam expressed pride in the CFTC’s “groundbreaking work in the digital asset space, which resulted in a record number of cases.” Behnam vowed that the CFTC “will continue to take all necessary action to protect customer funds and ensure fair prices for U.S. consumers.”
However, speaking Wednesday at the Financial Markets Quality Conference 2023 at Georgetown University, Behnam said he couldn’t rule out “another FTX-type event” occurring in the here and now. As he did last December in the wake of FTX’s collapse, Behnam expressed regret that Congress is unable to prioritize legislation that would more clearly delineate areas of responsibility for digital assets, leaving agencies like the CFTC unable to act until after the damage is done.
But hey, given the newfound willingness of Republicans to punch, elbow, and defenestrate each other, we’re sure legislative progress will be smooth sailing in 2024. Happy New Year!
Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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