Here’s what’s next for crypto as regulation affects the sector

• Both the SEC and CFTC have taken action against the crypto industry in recent weeks.
• Insider asked compliance experts about the implications of a growing attack on the space.
• Markets can withstand more volatility and price swings as a result.

Over the past month, top US financial regulators have announced a series of crackdowns on major crypto companies and those who work with them, action sources say could point to a broader regulatory crackdown brewing in the space.

Following regulatory actions including the Securities and Exchange Commission’s charges against crypto founder and entrepreneur Justin Sun, and the Commodities Futures Trading Commission’s case against Binance and founder Changpeng Zhao, market observers say the moves could be a preview of things to come.

Martin Grant, global head of regulatory affairs at financial firm JST Digital, says the recent enforcement actions show these agencies are “pushing hard to overturn the current regime to provide more investor protection.”

“But the question is, will the resolution of these cases provide a workable path for others to follow, or will the rules that emerge cripple an emerging industry,” Grant told Insider.

He added: “At the end of the day, industry participants are seeking regulatory clarity, which has yet to be achieved.”

Regulators are apparently more determined after billions of investor dollars were lost following the implosion of major players such as Sam Bam Bankman-Fried’s FTX and Do Kwon’s algorithmic stablecoin TerraUSD over the past year. Both disgraced crypto moguls have since been charged by US authorities.

High-profile cases like these made it clear that “new regulation was inevitable,” said Braden Perry, a former CFTC senior litigation attorney.

“With the rise of cryptocurrency, the crypto investment community has grown significantly, and both sophisticated and novices have joined the fray,” Perry, an expert in regulatory compliance and white-collar defense, told Insider. “[And] When it comes to crypto exchanges and wallets, it’s a transformed investment environment that’s ripe for new products and services — but also abuse.”

He added: “The ever-increasing number of exchanges/wallets and issues/hacks has undoubtedly acted as a shot across the bow for regulators and is likely to be the driving force for future rulemaking.”

As a result of more regulatory scrutiny, Youwei Yang, chief economist at mining company BTCM, says smaller projects with fewer resources could be pushed out of the space because they can’t afford to stay compliant.

“Compliance and regulatory efforts are expensive but necessary, the personnel will be almost as important as the technology people,” Yang told Insider. “Big crypto players who are more registered will eventually overtake the smaller players who are not compliant or who do not have enough capital to comply with the registration and daily monitoring at all costs.”

Markets may face more volatility after an attack because crypto prices are often sensitive to regulatory news. The pace at which regulators will make these decisions remains unclear, as they typically “lag in rulemaking and policy in unexplored areas of innovation,” Perry said.

“Nevertheless, such a public move with relatively notorious companies will undoubtedly affect the market, as seen in the recent price swings, and FTX’s collapse,” he added.

Perry says a well-designed regulatory framework that aims to deter bad actors and “not over-regulate the technology that has allowed greater market access,” is likely to be positive. However, this will require extensive effort and coordination between financial regulators, industry participants and legislators.

“As for the next steps, if cryptocurrency firms want to avoid further scrutiny, they need to prioritize strengthening their compliance controls, adopting and incorporating automated protocols and technologies to better understand their customers and identify potential risks,” Rory Doyle, Financial Crime Policy Manager at regtech solutions provider Fenergo, Insider told.

The SEC this month unveiled charges of fraud and breach of trust against crypto-founder and entrepreneur Justin Sun, and settled with a handful of celebrities such as Lindsay Lohan, Ne-Yo and Jake Paul for illegally promoting Sun’s tokens.

The SEC also issued a Wells Notice to Coinbase. The formal letter details the agency’s plans to initiate a possible enforcement action against the largest US crypto exchange for violations of securities laws.

Meanwhile, the CFTC last week slapped Binance and founder Changpeng Zhao with a lawsuit, alleging that the world’s largest crypto exchange by volume consistently violated US rules on derivatives trading.

“The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a travesty, and Binance deliberately chose — over and over again — to place profit over following the law,” Gretchen Lowe, chief counsel in the CFTC’s enforcement division, said in a statement.