After the Kraken Crackdown, are the remaining crypto giants staring down the barrel of the US government’s gun?

The latest action by the US Securities and Exchange Commission (SEC) against Kraken is likely just the first move of a US government campaign to come for the major remaining crypto exchanges, according to industry lawyers, consultants and former regulators.

The San Francisco-based exchange reached a landmark settlement with the SEC on Thursday, in which Kraken agreed to shut down its U.S. betting services and pay a $30 million fine amid the agency’s accusations that the services amounted to the sale of securities. This enforcement action likely marks the beginning of similar cases putting large exchanges in the spotlight.

The chairman of the SEC has made clear his intention to come after the cryptocurrency titans, all but announcing a timetable for enforcement actions, and his counterpart at the Commodity Futures Trading Commission (CFTC) is promising a big year. On the criminal side, the Department of Justice (DOJ) is unlikely to allow other companies to move away from conduct that warranted criminal charges in previous cases.

“We’re in the early days of some big upheaval,” said Mick Mulvaney, a former acting White House chief of staff under former President Donald Trump who now advises a company in the digital assets sector. “The industry gives people who hate it a lot of ammunition.”

As Jaret Seiberg – an analyst at Cowen – put it: “We expect the SEC to rely on enforcement over the coming year to shape the crypto sector. We see the biggest threat to trading platforms, which we suspect the agency will claim are illegal exchanges.”

With Kraken, Coinbase and Binance making headlines, the industry is gearing up.

As the Justice Department recently began preparing the grounds for a major criminal announcement last month, crypto lobbyists and lawyers in Washington, DC believed that prosecutors would announce a marquee name. When little-known, Hong Kong-based Bitzlato turned up, industry insiders breathed a sigh of relief.

But the money laundering case mentioned that leading crypto platform Binance was one of the company’s major counterparties. Another of Bitzlato’s top counterparts, LocalBitcoins, announced it would shut down this week. One observer noted that prosecutors are usually hesitant to name other companies in legal actions, but they did so this time.

Binance and its executives have reportedly been targeted by the Department of Justice for potential criminal money laundering charges. But it could also draw the SEC’s attention, because when the US regulator went after its rival, FTX, the SEC called the exchange’s native token FTT a value, potentially meaning Binance’s BNB is similarly vulnerable.

Most recently, Binance admitted that it accidentally kept some of its own funds in the same wallet as user assets – the kind of mix-up that often results in severe penalties for regulated companies, even if the company itself discloses the breach.

The industry’s high-profile lapse over the use of customer money — raising the specter of the collapse of MF Global for Washington’s regulatory community — has spurred a push to segregate crypto customers’ money as one of the main drivers for lawmakers looking to erect regulatory fences around crypto.

A lack of walls around investors’ crypto assets also triggered one of several run-ins another prominent exchange, Coinbase, has had with the SEC.

A Coinbase statement sparked an uproar last year about how customer funds are maintained on exchanges when the company revealed investor money could be tied up in a hypothetical bankruptcy, and it blamed SEC guidance for forcing it to issue the statement. The company also reportedly dealt with an SEC investigation into a number of its business practices, including striking. As with Kraken, staking has been a significant service offered to Coinbase customers, although the company argued Thursday that Kraken essentially offers a yield product while Coinbase does not.

“Coinbase’s staking services are fundamentally different and are not securities,” said Paul Grewal, head of legal affairs, seeking to ward off the perception that the SEC is signaling that these mainstream crypto services may be targeting other companies.

But Coinbase’s main dispute with the US securities regulator may be the impasse over registration as an exchange. SEC Chairman Gary Gensler never tires of telling the crypto industry that their exchanges need to come in and register, because “the vast majority” of crypto tokens are securities, and exchanges like Coinbase that list them are violating securities laws. Of course, these tokens are also unregistered, adding another layer of friction with the agency.

Coinbase has claimed it would never allow securities on its platform, but the issue has come to a head. Last year, the SEC pursued an insider trading case against a former Coinbase manager, and in its charges identified nine tokens as securities, most of which traded on Coinbase. While the agency has yet to go after Coinbase with a direct enforcement action, it is now on record as flagging unregistered securities trading at the company and is on the hook to prove it in federal court.

Spokesmen for the DOJ and SEC declined to comment for this report. Representatives for Binance and Coinbase did not respond to requests for comment, and Kraken declined to comment, though it said of the settlement Thursday that it “neither admitted nor denied the SEC’s allegations.”

If the government wages a legal war against the platforms for the way they do business – and not a reactive enforcement buzzsaw like the one that took down FTX – it could mark a decisive turning point.

“The SEC has a number of options, and they’re not going to be afraid to use them,” said Mark Hays, a senior policy analyst for Americans for Financial Reform, which supports the SEC setting tough limits on the industry. “It seems entirely possible that a major platform could be exposed to some of these things in the near future.”

The sector is already suffering through crypto winters and reeling from a series of self-inflicted wounds that left it with a tarnished reputation and a lack of trusted institutions. While crypto-purists take pride in the decentralization ethos they have nurtured, the vast majority of digital asset investors prefer to hand over their holdings to be managed by others. Another cage fight with regulators could add to the dwindling number of options.

“For an industry that’s already seeing a lot of capital fly away from it, it’s bound to have a big impact,” Hays said.

SEC chief Gensler has said the “runway is getting shorter” for the industry to meet compliance requirements, and he warned in a CNBC interview Friday — after his agency moved against the Kraken strike — that “other platforms should take note and seek to conform.” CFTCm chairman Rostin Behnam said last week that this will be a “strong year of precedent-setting cases.”

There is a race going on between the executive branch of the US government – ​​the Treasury Department, financial regulators and the Justice Department – ​​and federal lawmakers on legislation. While Congress has more power to outline lasting rules for the industry, the likelihood that it will come up with crypto legislation before regulators make their moves is diminishing.

“The risk is that Congress moves so slowly that the administration is able to do things that affect the basic structure of the industry,” said Mulvaney, who served in the House of Representatives and also ran a regulatory agency before now advising Swiss startup Astra Protocol. is a valid concern, which is why those of us who are industry advocates hope that Congress moves quickly.”

Meanwhile, the inferno of FTX and some of the other crypto misdeeds confirm some of people’s darkest fears about crypto and blockchain, he said, further impeding the legislative process. However, he said it is “not a capital offence” for the industry and the current drama should not be terminal, because FTX was about people taking and misusing money, not flaws in the technology.

Blaming the individuals rather than the innovations is a mantra that captures Republican lawmakers, including Rep. Patrick McHenry (RN.C.), who now chairs the House Financial Services Committee that will have a central role in crypto legislation this year. He also builds a case against Gensler as a driver of the industry’s missteps.

“Gary Gensler’s regulation through enforcement does not protect consumers,” McHenry said as his committee began work last week. “Americans have lost billions of dollars in digital assets to bad actors on his watch.”

Gensler has never backed down from his simple claim that most of the industry runs afoul of securities laws, and most tokens meet the legal definitions of securities outlined in the so-called Howey test. The industry, for its part, has consistently maintained that he is asking them to sign up for a program that does not exist.

“The SEC has never said what a compliant crypto exchange will look like under a securities regulatory regime,” said TuongVy Le, who handles regulatory strategy at Bain Capital Crypto. “There’s just a lack of clarity there.”

Patrick Daugherty, a lawyer who once worked at the SEC but now represents crypto companies and exchanges, put it in starker terms:

“There is no avenue available under current law for a crypto exchange to register with the SEC,” he said, citing a registered exchange’s requirements to maintain an audit trail, have only brokerages as members and trade only securities and nothing else. “There is no crypto exchange that can comply.”

Daugherty, who works at Foley & Lardner in Chicago, said he doesn’t necessarily advise his clients to voluntarily go in and talk to the regulator, as Gensler often suggests. He said the agency never says yes to anything and sometimes uses what it learns in enforcement actions.

“I don’t think it’s the staff; I think it’s the chairman,” Daugherty said. “This is how Gensler chooses to do things”

But some crypto companies are negotiating settlements with the SEC, as Kraken did with this week’s action. It can also be troubling, Le said, because the agency doesn’t write crypto regulations; it governs the industry with its penalties.

Such agreements are drawn up in private negotiations with the companies, although the results can be expected to set a precedent in the industry.

“The reason the rulemaking process exists is so these conversations don’t all happen in a back room somewhere,” Le said.

While she said she can’t envision what a settlement looks like that breaks through the impasse of crypto platforms registering as exchanges, she hopes something is being worked out. Unlike many in the industry, she has an optimistic view of Gensler.

“I don’t think he wants to kill the whole industry,” she said.