More strict rules for the SEC during encryption custody
- The SEC has escalated its campaign to rule.
- The regulator once again pushed efforts to create stricter rules for crypto companies.
It looks like the Securities and Exchange Commission (SEC) is getting stuck into cleaning up the wild west of crypto. It’s gone after the big crypto players like Gemini and Kraken. It also uses unregistered securities rules as its key hammer.
The SEC’s recent action
In recent weeks, the SEC has been swift in its efforts to reprimand crypto offerings it deems to be breaking the rules. It relies on the argument that they are unregistered securities.
The most high-profile case came against one of crypto players Genesis and the Winklevoss twins’ Gemini in January, after the SEC accused the disastrous “Gemini Earn” program of being an unregistered securities offering.
Last week, Kraken, a crypto exchange, paid a $30 million settlement to the SEC. Kraken also agreed to end its “staking” program, where investors lock up their holdings of digital assets for an interest-based reward.
Recently, crypto firm Paxos was forced by the New York Department of Financial Services (NYDFS) to stop minting its stablecoin following a planned SEC lawsuit over the sale of unregistered securities. It differs from the previous staking colours.
The much-hyped collapse of FTX last November has undoubtedly increased the need to rein in potentially risky offerings. This crypto industry crash also locked up billions of dollars in customer deposits. But the SEC’s discomfort with crypto goes back years — as long as the asset has been popular. In October 2021, SEC Chairman Gary Gensler noted the crypto industry as “a bit of the Wild West.”
The staking programs have become a means for crypto companies to inflate the value of their assets using consumers’ funds. An investigation into now-bankrupt crypto firm Celsius found that it had used customer funds to prop up the value of its original coin in an attempt to return high returns to investors.
The SEC noted the Howey test for determining whether an asset can be classified as a security. This Howey test has four prongs, all of which must be met to establish as a security: an investment of money, in a joint venture, with expectations of profit, and to be derived from the efforts of others.
So in the US, if an asset is considered a security, it must be registered with the SEC. Meanwhile, the SEC says an unregistered security is simply one that hasn’t been rubber-stamped by the regulator. And unregistered securities have been the subject of various scams, with the SEC saying their hallmarks include the promise of high returns without risk, aggressive sales tactics and being backed by unqualified investment professionals. Therefore, its use is limited.
The SEC and crypto companies will have to wait for the outcome of several lawsuits to set a precedent. The outcome could mean that crypto companies would have to register offerings and assets as securities.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while graduating. A keen observer of detail, he shares his passion for writing alongside being a developer. His backend knowledge of blockchain helps him bring a unique perspective to his writing
