- The SEC has stepped up its campaign to reign in what its chairman has called the "Wild West" of cryptocurrencies.
- Gary Gensler has gone after the Winklevoss twins and Kraken, the third largest cryptocurrency exchange in the world.
- But his target of unrecorded assets has left some in the cryptocurrency sector with an answer: It's war.
After many calls to clean up the wild west of cryptocurrency, it looks like the SEC is finally getting in.
It has gone after big names like Gemini and Kraken, and is using unregistered securities rules as its key hammer.
We explain what they are and what the industry does about regulatory repression.
What has been signed up?
The SEC has been quick in recent weeks in its attempt to rebuke cryptocurrency offerings it considers to be in breach of the rules, on the grounds that they are unregistered securities.
The most high-profile lawsuit was filed against the Winklevoss twins' cryptocurrency giant Genesis and Gemini in January, after the The SEC accused its disastrous "Gemini Earn" program to be an offer of unregistered securities.
Then Kraken, the third largest crypto exchange in the world, last week. paid a $30 million settlement to the SEC and agreed to stop its "participation" program, where investors lock in their digital asset holdings for an interest-based reward.
And this week, the New York Department of Financial Services (NYDFS) forced the crypto company Paxos to stop minting your Binance-branded stablecoin after a planned SEC lawsuit over the sale of unregistered securities. This differs from previous betting suits.
A spokesperson told Insider that he categorically disagreed with the SEC staff, arguing that its BUSD coin was not a security.
Because right now?
The FTX crash in November, which locked up billions of dollars in client deposits, has undoubtedly increased the urgency to rein in potentially risky offerings, as that event did. contagion effects in Genesis and Gemini.
But regulators' discomfort with cryptocurrencies goes back years, as long as the asset has been popular. In October 2021, SEC Chairman Gary Gensler referred to the cryptocurrency sector like "a bit of the Wild West".
Emerging evidence suggests that programs like staking have become a means for crypto companies to inflate the value of their assets using consumer funds.
An investigation into the crypto giant Celsius, now bankrupt found the company had used client funds to prop up the value of its native currency in an attempt to return high returns to investors.
What is an unrecorded value?
A security, more simply, is a financial instrument traded for profit. They form the basis of investment contracts for thoughts like stocks, debt, and derivatives.
The SEC targets the Howey's test to determine whether an asset can be classified as a security. This test has four points, all of which must be passed to determine a value: [1] an investment of money [2] in a common company [3] with profit expectations [4] derived from the efforts of others.
In the US, if an asset is considered a security, it must be registered with the SEC. For example, an initial public offering (IPO) of a newly listed stock represents the first offering of your newly listed securities.
Securities need to be registered as it gives the issuing company the relevant shareholder information to pay dividends and provides relevant information related to shares. It also helps reduce fraud by keeping the rightful owner of the security on record.
According to the SECan unregistered security is simply one that has not been approved by the regulator.
Unregistered securities have been the target of various scams, and the SEC says their hallmarks include the promise of high returns without risk, pushy sales tactics and being backed by unqualified investment professionals. As such, its use is limited.
Only accredited investors, defined as those with a net worth greater than $1 million or an annual income greater than $200,000, are allowed to trade unregistered securities, which basically locks out most retail investors. The threshold is considered an indicator of financial sophistication and suggests a buffer for eligible investors against possible losses.
However, the debate in the cryptocurrency world is not about whether or not assets should be registered, but more fundamentally whether they should be classified as securities.
So what's the confusion?
There has long been a debate about whether a digital asset, essentially software, is a commodity like gold or a security like an ETF. To this end, cryptocurrencies are typically regulated by the Commodity and Futures Trading Commission (CFTC), indicating their status as a commodity.
However, Gensler has argued most cryptocurrencies meet the legal definition of valueand must be registered with the SEC.
But the evolution of the cryptocurrency sector, specifically through programs such as staking and initial coin offerings (ICO), are blurring the lines and giving the SEC ammunition to clamp down.
The crackdown is focused on companies that promised returns to customers, either for staking their crypto on a blockchain or for lending their crypto with a guaranteed percentage return, as with Kraken and Gemini's Earn program, respectively. These could be viewed as investment contracts.
Cryptocurrency enthusiasts tend to argue that the asset does not pass the four points of the Howey test for determining a security or investment contract, since it does not generate value through the efforts of others.
Meanwhile, last week, Coinbase chief legal officer Paul Grewal also pushed back against the idea that staking is a security. in a noteargued that staking failed on all four points of Howey's test, not just the fourth on value creation.
"Trying to superimpose securities law onto a process like staking does nothing to help consumers," Grewal wrote. "Instead, unnecessarily aggressive mandates will prevent US consumers from accessing basic crypto services in the US and push users onto unregulated offshore platforms."
More fundamentally, crypto industry bigwigs from Brian Armstrong to Anthony Scaramucci have heaped on the SEC's ruling on Kraken's "participation" program, describing it as an attack on economic freedoms.
Whats Next?
Crypto companies and the SEC will have to wait for the outcome of several lawsuits to set a precedent. The result could mean that crypto companies have to register offerings and assets as securities, but some argue that this has left them in no man's land.
โEnforcement regulation is perplexing to cryptocurrency enthusiasts,โ Globalblock Crypto, a digital asset brokerage firm, said in a note.
โThe SEC claims that โall crypto projects have to go in and registerโ but when they do they are just told โnoโ. People are desperately trying to figure out how to offer a product legally without getting any guidance.โ
Scott Melker, the "Wolf of All Streets" cryptocurrency trader, had more options.
โIt is clear that the United States is going to war with the crypto industry,โ he said. tweeted.
"If it's war they want, it's war they'll get."
