After crypto crash comes the SEC crackdown

It’s been a tough couple of months for some people who have had it easy for a long time. A growing number of cryptocurrency operations may finally face some consequences for their alleged illegal actions.

On Monday, the Securities and Exchange Commission charged 11 people behind Forsage, calling it a $300 million Ponzi scheme disguised as a smart contract system. This was less than a week after the New York Times reported that crypto trading platform Kraken was being investigated by the Treasury Department for violating US sanctions against Iran. And just days before that, the FBI and a US District Attorney in New York indicted three people, one of whom was a former Coinbase employee, on charges of insider trading.

Which agency is responsible for regulating cryptocurrency is not clear. Both the Commodity Futures Trading Commission and the SEC claim jurisdiction here. However, the SEC seems to be particularly interested in going after crypto schemes that fall under its purview – which appears to be most of them.

“The SEC is in the midst of a sustained attack against crypto firms from all directions,” John Reed Stark, a cybersecurity expert and former SEC enforcement attorney, told Recode. Stark noted that the agency has expanded its crypto unit and SEC Chairman Gary Gensler has made no secret of his belief that many cryptocurrencies are securities and that he intends to regulate them as such.

So even though it’s warm outside, we’re in the middle of a crypto winter that may never end. During the pandemic, the cryptocurrency market grew to $3 trillion, helped by new platforms that made investing easy enough for just about anyone to do. Since November last year, however, the market has plunged. It’s now worth about a third of what it was at its peak, and there’s no sign that its value will rebound significantly anytime soon. The crash has devastated some of the companies operating in this area – and their customers too.

Now comes the law for certain crypto companies and their executives. But it remains to be seen exactly what consequences, if any, many of these companies and the people behind them will face.

Unlike traditional banks, when crypto-lending platforms go up, there are no safeguards in place to ensure investors are made whole. Two crypto lending platforms, Celsius and Voyager, went bankrupt in July, and their customers may never get their money back. Some supposedly safe crypto-investments called “stablecoins,” which are pegged to the value of a fiat currency like the US dollar, have also proven not to be very stable at all. Last May, the stablecoin Terra’s value plummeted, dragging the Luna coin, whose value was tied to Terra’s, down with it. Luna was once worth as much as $116. Now it’s worth a fraction of a cent.

But as investors’ losses mount and enforcers’ extended crypto arms begin to function, it appears that a day of reckoning is finally coming for some of these companies, which have operated in an area of ​​few regulations. The outright scams clearly didn’t follow the rules at all. But some of the more legitimate companies have reportedly played fast and loose with them as well.

“The arrogance and hubris in the crypto space is so unbelievable,” Stark said. “They’re always belligerent, belligerent and calling the SEC questionable.”

“I’ve never seen anything like it and I’ve been training for over 30 years,” he added.

Again, the SEC is just one of several government agencies going after crypto. And when many people lose a lot of money, the government is going to follow even more. But that may not do much for some people, as crypto is not regulated like traditional banks and securities – something many crypto investors didn’t realize until it was too late.

“With so much new money pumping up token values, so many people wanted in without understanding anything about the space,” said Matt Binder, a reporter for Mashable who also hosts. Scam economy, a podcast dedicated to crypto and Web3 scams. “And the industry exploited a lot of these people.”

It didn’t help that some of their favorite celebrities were endorsing these projects, or that some of these companies were apparently so flush with cash that they could buy ad space at the most expensive show in town. It also didn’t help that crypto became as easy to buy as an ATM transaction. And it really didn’t help that many people went into crypto knowing little, but assuming they wanted the same protections they have from more regulated institutions like traditional banks and investment firms.

Stark predicts that we will see more action against these crypto companies in the coming months and years, with the SEC focusing its efforts not on petty fraudsters, but on the gatekeepers they use for their scams: “trading exchanges, platforms, whatever you want to call them .” And he thinks it and any other agency investigating the crypto world will get a lot of help, possibly from people in it.

“When companies start getting involved in this kind of thing, you get people who want to be whistleblowers, or they become whistleblowers,” Stark said. “And when prosecutors start snooping around, people can become informants very quickly.”

Molly White, who has chronicled various Web3 failures on Web3 Is Going Just Great, is not yet so sure that the increased scrutiny, investigations and accusations will amount to real change.

“The insider trading costs feel like a drop in the bucket compared to the amount of insider trading that has been clearly known to happen on Coinbase and elsewhere, but at least it’s something,” she said. “It worries me how slowly these actions are coming out in an industry where people can commit fraud after fraud in the meantime.”

“I’ll think that’s progress when I see it,” she said.

If regulators can’t make that progress in court, perhaps at least all the attention the crypto crash has received will discourage potential investors from putting money into a volatile market they don’t really understand and offers them few protections.

“I think these interventions can help keep the public away from crypto,” Binder said. “There will be some companies that try to ‘go legit’ but at the end of the day they are still a crypto company selling the dream of getting rich via speculative asset trading, with no real product or service.

However, it won’t do much for the people whose dreams have already turned into nightmares. White said that while some of the past stories of crypto losses were more fun and the victims less sympathetic (see: “All My Apes Gone”), that’s no longer the case. “Now we see people writing letter to a bankruptcy judge about how they are financially devastated and considering suicide,” she said.

Or as Binder put it: “We have a few people who hit the lottery and a ton more who lost it all.”

Correction, 8 August at 1 p.m. ET: An earlier version of this story said three former Coinbase employees were indicted for insider trading; only one of the three was a former Coinbase employee.

This story was first published in the Recode newsletter. sign up here so you don’t miss the next one!