U.S. Regulators Crack Down on Crypto Industry – 18 April 2023

SEC Cranks Up Pressure on Tron and Coinbase.

• The recent moves by U.S. regulators to clamp down on the crypto industry, including the lawsuit against Tron founder Justin Sun and threats against Coinbase, the largest remaining U.S.-based crypto exchange, have brought the long-running dispute over crypto exchanges’ business models to a head.
• The Securities and Exchanges Commission (SEC) formally charged Sun with illegally distributing tokens such as Tronix and BitTorrent, and manipulating the market in them to give the appearance of stability and liquidity. The SEC also charged a handful of celebrities paid by Sun to promote the assets on social media, including actress Lindsey Lohan and rapper Soulja Boy.

• In addition, the SEC sent a so-called Wells notice to Coinbase, indicating that it intends to begin enforcement action against it, too, on the basis of having illegally distributed unregistered securities. Coinbase stock, which has already lost 70% since going public in 2021, fell another 10% in after-hours trading.
• The crackdown on the crypto industry has been long-awaited, with staking services, in particular, being in the crosshairs of the SEC for years. These services offer frequently high yields and rely on the efforts of others rather than investors to generate value. However, scrutiny has increased markedly in the months since the collapse of FTX, with rival exchange Kraken closing its staking service in February and agreeing to pay $30 million for failing to register it with the SEC.
• Coinbase management remains unfazed by the development, with CEO Brian Armstrong welcoming the opportunity for Coinbase (and by extension the broader crypto community) to get before a court. Coinbase and others in the space have been able to exploit a turf war between the SEC and the Commodity Futures Trading Commission (CFTC) over who has the authority to regulate them. While the CFTC sees crypto assets as commodities, the SEC views them as securities, a view that has gained traction as staking services have increased in popularity.
• The Wells notice sent to Coinbase does not always lead to charges or signal that the recipient has broken the law. However, it is a warning that regulators are keeping a close eye on the crypto industry and are willing to take action against those who do not comply with the rules.
• This crackdown is necessary to protect investors and prevent fraud and manipulation in the crypto industry. While cryptocurrencies and blockchain technology have the potential to revolutionize the financial industry, they are still relatively new and untested, with many risks and uncertainties. As such, it is important for regulators to establish clear guidelines and regulations to protect investors and ensure the stability of the financial system.
• However, there are concerns that excessive regulation could stifle innovation and growth in the industry. The crypto industry has already faced significant challenges, with many countries banning or restricting cryptocurrencies and exchanges. Excessive regulation could drive businesses and investments away from the U.S. to more crypto-friendly jurisdictions.
• Therefore, it is important for regulators to strike a balance between protecting investors and promoting innovation and growth in the industry. Clear guidelines and regulations should be established, but they should not be so restrictive that they stifle innovation and drive businesses away.
• In conclusion, the recent crackdown on the crypto industry by U.S. regulators is a necessary step to protect investors and prevent fraud and manipulation in the industry. While excessive regulation could stifle innovation and growth, clear guidelines and regulations should be established to strike a balance between protecting investors and promoting innovation and growth in the industry. The crypto industry has the potential to revolutionize the financial industry, and it is important for regulators to establish a framework that allows this potential to be realized while protecting investors and ensuring the stability of the financial system.