The US crypto breakout could reshape the industry
Tthe American crypto community has long regarded Gary Gensler as one of its arch-enemies. Over the past few years, the head of the Securities and Exchange Commission (SEC) has often spoken about the dangers of cryptocurrencies and the need to heavily regulate the industry.
And since the FTX crash in November, Gensler has only stepped up his aggression against crypto. While Congress has made little progress in passing a regulatory framework for crypto, Gensler has used his own powers to crack down on the industry. Over the past couple of months, the SEC has accused several major crypto companies of violating securities laws.
Many crypto insiders are now complaining that Gensler’s actions are stifling innovation and driving crypto businesses abroad. Others, however, argue that Gensler’s approach will weed out bad actors and help legitimize a heavily stigmatized and risk-taking industry. Regardless of what happens next, Gensler’s actions represent a key turning point for crypto.
“It certainly feels like a crypto carpet-bombing moment,” says Kristin Smith, executive director of the Blockchain Association, a crypto lobby group. “When the lawyers analyze this space, they think very hard about whether the United States is the right place to base some of these crypto activities.”
Federal Offensive
At the heart of this battle is the debate over whether cryptocurrencies should be considered securities or commodities. Securities are regulated by Gensler’s SEC, which has a reputation for tougher regulation than the Commodities Futures Trading Commission (CFTC), the commodities watchdog. Many crypto leaders, including FTX’s Sam Bankman-Fried when he was still in power, argued that most cryptocurrencies are commodities and pushed hard for the CFTC to manage their industry.
Read more: Crypto goes to Washington
Gensler, on the other hand, views most crypto products as securities. Since January, he has used this framework to charge several major crypto companies, including Gemini, Genesis and Kraken, with failing to register financial products with the SEC. These three companies offered return programs, where investors earned interest on the money they deposited. While the companies gave the products different names from each other, Gensler argues that they were all similar mechanisms that should be under his SEC purview.
Gensler issued a warning to all similar programs. “This should really make everyone aware of this marketplace,” he said on CNBC. “Whether you call it lend, earn, give, APY, it doesn’t matter … They should try to come into compliance.”
Genesis imploded after the FTX crash, and still owes $900 million to investors who put their money into Gemini Earn. Tyler Winklevoss, co-founder of Gemini, tweeted that the SEC’s action was “counterproductive” to helping users get their money back, calling the complaint a “manufactured parking ticket.”
Gensler’s targeting of yield programs comes a year after one of those products played a major role in the collapse of the entire crypto market. Last year, a crypto protocol called Anchor promised investors a staggering 20% return if they put their money into the Terra-Luna ecosystem. Many critics, even those in the industry, said Terra-Luna’s model was unsustainable, and sure enough, it collapsed last May.
read more: What we can learn from Terra’s fall
Two weeks ago, Gensler accused the creators of that ecosystem, Terraform Labs and founder Do Kwon, of securities fraud, saying they misled and deceived investors. “This case shows the lengths some crypto firms will go to avoid complying with securities laws,” Gensler wrote in an accompanying statement.
Repercussions
While the SEC is leading the charge against crypto, other government agencies have also turned against the industry. The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued a joint statement last week warning banks about the liquidity risk of stablecoins. The White House released a statement warning about the risks associated with crypto earlier in February. And the New York Department of Financial Services announced that it had ordered Paxos, the issuer of the world’s third largest stablecoin, Binance USD, to stop minting new units of the crypto token.
All of this means that crypto organizations of all kinds, from miners to exchanges to lenders, are likely to become much more wary of doing business in the US to avoid risking regulatory action. Many Decentralized Finance (DeFi) companies already offer products to investors overseas while restricting US users, a trend that could escalate.
“Overall, the interest of investors looking to fund development in the space is waning,” says Smith, of the Blockchain Association. “Developers need to think twice about starting something here in the US.”
Smith says the SEC is taking a “no-stone-left-unturned” approach, affecting crypto companies, including staking providers, exchanges and centralized service providers, as well as venture capitalists. “If you look across the spectrum, he’s really working to touch all these areas,” Smith says of Gensler. “And the lending area is most affected: it is more or less non-existent today. Almost all of these suppliers have faced enforcement or are going out of business.”
This week has many crypto enthusiasts shared a claim on Twitter that the SEC had shut down a $75 million crypto-metaverse fund managed by company EveryRealm as part of its crackdown. However, Jesse Stein, head of asset management at the company, contested this characterization in an interview with TIME. Stein says that while EveryRealm had decided in February not to proceed with an investment offering that featured virtual real estate in blockchain-based worlds like Sandbox and Decentraland, the decision had nothing to do with the SEC’s approach to crypto.
“The SEC did not contact us or do anything to force us to close this offering or affect our interest in moving it forward,” Stein says.
Stein says he has no plans to slow down his blockchain-based investments, and that he actually welcomes Gensler’s approach to crypto. “Our company doesn’t mind at all, because we’ve tried to make everything as consistent as possible,” he says. “If the SEC continues to move in this direction and the market becomes fully regulated — and if these projects are really viable — you’re going to see institutional capital come in. I think at the end of the day, it’s going to be a net positive for the industry. ”
Smith and the Blockchain Association, meanwhile, are weighing their options against Gensler’s latest batch of regulatory actions. Some crypto companies have been locked in legal battles with the SEC for months or years over similar fault lines, including Ripple and Grayscale.
“We’re working with our legal team and outside counsel to try to determine if there’s any proactive feedback we should be doing in the courts,” Smith says. “We think this is a fight worth fighting.”
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