Crypto crackdown: SEC and Treasury reportedly investigating exchanges

Volatility aside, crypto has been perhaps best known for lawlessness over the past decade. Mysterious cryptocurrency founders have disappeared after pocketing millions from initial coin offerings, while hackers and fraudsters have sought refuge in a financial wild west enabled by the blockchain.

The US government is working to change that, according to two investigations revealed on Tuesday. Coinbase, the largest crypto exchange in the United States by trading volume, is facing an investigation by the Securities and Exchange Commission, according to Bloomberg. The SEC is reportedly arguing that the 150 tokens Coinbase allows users to buy should be listed as securities, which would bring the exchange under the regulator’s responsibility.

If cryptocurrencies are categorized as securities, companies hoping to create or trade crypto must register with the SEC. It would also mean that some crypto scams would be crimes. Coinbase’s stock fell 21% after Bloomberg’s report.

Then there’s Kraken, a crypto exchange valued at $10 billion, which the New York Times reports is being investigated by the Treasury Department’s Office of Foreign Assets Control for alleged sanctions violations. Kraken is accused of allowing customers in Iran to buy and sell crypto, a violation of US sanctions, according to the Times. It follows a warning from the US Treasury last October that digital assets such as bitcoin and ether could make it easier for countries such as Iran, North Korea and now Russia to evade sanctions.

“Kraken has robust compliance measures in place and continues to grow its compliance team to match business growth,” the company’s legal director Marco Santori said in a statement. “Kraken closely monitors compliance with sanctions laws and, as a general matter, reports to regulators itself potential problems.”

Coinbase’s chief legal officer, Paul Grewal, tweeted: “I’m happy to say it again and again: we are confident that our rigorous due diligence process – a process the SEC has already undergone – keeps securities off our platform, and we look forward to contact the SEC on the matter.”

The cases in Kraken and Coinbase are different from each other, but both highlight the expanding degree to which regulators and law enforcement are targeting crypto companies. The anonymity provided by the blockchain makes it difficult, but not impossible, to crack down on specific users. Companies and their employees make easier goals. The SEC in June launched a similar investigation into Binance, to determine whether the exchange’s BNB cryptocurrency should be listed as a security.

Surveys are also starting to show results. Last week, federal prosecutors charged Ishan Wahi, a former Coinbase product manager, with insider trading, alleging that Wahi leaked information to his brother and a friend about upcoming altcoin listings. It is being called the first insider trading fee associated with digital tokens. In June, a product manager at NFT marketplace OpenSea was charged by the FBI with using confidential information to buy NFTs shortly before they were promoted on the site, which was also called a first.

Perhaps most importantly, legislators are slowly but surely working on bills which will see cryptocurrencies come under more explicit legal frameworks. A bipartisan bill presented to the Senate argues that cryptocurrency should be regulated as a commodity and as such fall under the auspices of the Commodity Futures Trading Commission (CFTC). Meanwhile, the House Finance Committee is working on a bill that could put issuers of stablecoins, which are pegged to fiat currencies like the US dollar, under Federal Reserve oversight.

The crypto collapse of 2022 has apparently excited regulatory impulses. A large part of the crash in bitcoin and ether can be attributed to poor macroeconomic conditions. The same interest rate hikes that caused bitcoin to crash also took a toll on tech stocks, but the crypto industry has seen a painful contagion that has compounded the chaos. When Terra’s stablecoin was released, it wiped billions in value from the market. It caused the insolvency of the hedge fund Three Arrows Capital. When 3AC could no longer pay its debts, a company it owed over $600 million to, Voyager Digital, declared bankrupt.

Crypto boosters remain confident tokens like bitcoin and ether will live on to see new, staggering all-time-high valuations. By the time that happens, if the US government gets its way, the Wild West might not be so wild.