The government is cracking down on the crypto industry with a flurry of actions

Cryptocurrency leaders hoped that 2023 would herald a new beginning after a year of catastrophic setbacks. Instead, the industry has ended up on the receiving end of an aggressive government crackdown.

Last month, the Securities and Exchange Commission levied fines and other penalties against crypto-lending firms, while federal banking officials issued policy statements that appeared intended to make it harder for crypto companies to participate in the mainstream financial system.

In recent days, the pace has increased. Two high-profile crypto firms — including a popular exchange where people buy and sell digital coins — came under intense pressure from state and federal regulators. After announcing a settlement with the exchange, the SEC also fined a crypto promoter and sued a startup that issued digital coins, for a total of three enforcement actions in just over a week.

The actions are likely a prelude to a protracted period of legal wrangling, as regulators respond to the market turmoil that prompted prominent crypto companies to file for bankruptcy last year and cost investors billions of dollars. And it signals a growing need in Washington to address the threat posed by cryptocurrencies, an experimental technology that enables new forms of financial speculation.

“I’ve referred to it as the crypto carpet bombing,” said Kristin Smith, CEO of the Blockchain Association, a trade group for the crypto industry. “Every couple of hours we hear about new enforcement actions.”

For years, regulators were criticized for not cracking down on the crypto industry, even as it grew into a multitrillion-dollar business. In November, the FTX crypto exchange, once considered one of the most trusted firms in the freewheeling industry, failed virtually overnight, and its founder, Sam Bankman-Fried, was charged with orchestrating a year-long scam.

That put regulators under intense pressure to act. Crypto companies have long existed in a legal gray area, with lawmakers and government officials debating how to classify them for regulation. The industry’s growth has outpaced the slow-moving federal bureaucracies that oversee the other parts of the financial industry, such as traditional banks and publicly traded companies.

After FTX filed for bankruptcy in November, the SEC, the Justice Department and the Commodity Futures Trading Commission, another regulator, all brought cases against Mr. Bankman-Fried and two of his top lieutenants.

But activity against the broader industry picked up last month when the SEC fined crypto lender Nexo $45 million and accused competitor Genesis of offering unregistered securities.

Last week, the SEC announced a settlement with crypto exchange Kraken that removed one of its popular investment products from the US market, which could have major implications for the industry. The agency also sent Paxos, a company that issues so-called stablecoins pegged to the US dollar, a warning of a potential lawsuit over securities violations.

This week, the SEC sued Terraform Labs, the company that developed the digital coins Luna and TerraUSD, which collapsed last spring and triggered a broader meltdown in cryptocurrency prices. On Friday, the agency announced that former National Basketball Association star Paul Pierce had agreed to pay $1.4 million to settle allegations that he marketed a cryptocurrency without proper disclosures.

Beyond the SEC, three top financial regulators sent a letter to banking organizations last month, warning them to exercise caution in their dealings with cryptocurrencies. Also last month, the Federal Reserve rejected an application by Custodia Bank, a crypto company, to join the central bank’s payment system.

The wave of enforcement has created fury and anxiety in the crypto industry. Some industry advocates have dubbed the government’s efforts “Operation Choke Point 2.0,” referring to a law enforcement campaign in the 2010s to prevent banks from doing business with certain businesses.

An industry lawyer said he was advising executives to prepare for as long as five years of high-profile, costly litigation with the government. Crypto companies have privately traded tips on which law firms to hire to handle government lawsuits, said the lawyer, who requested anonymity to describe sensitive legal discussions.

“What’s happening today is a coordinated effort that cuts across multiple agencies and appears to reflect a unified view that the entire crypto industry must be restrained,” said Paul Grewal, general counsel at Coinbase, the largest U.S. crypto exchange. “It is important for the crypto industry to prepare for a long battle.”

Representatives of the SEC and the Federal Deposit Insurance Corporation, a banking regulator, declined to comment. Other federal banking regulators did not respond to requests for comment.

Since virtually its inception, the crypto industry has faced scrutiny from regulators. And in 2021, when the market soared to record highs, some officials in Washington sounded the alarm. SEC Chairman Gary Gensler has argued that the vast majority of cryptocurrencies are securities, like stocks traded on the stock market, and should be subject to the same strict regulations. His office spent months building cases against crypto firms, some of which are now coming to fruition.

At the same time, the crypto industry cultivated allies in Congress who proposed legislation that would have made it easier for the companies to offer a wide range of experimental products in the United States.

Since FTX’s implosion, the content of these discussions has changed. In private conversations, Capitol Hill staffers who once seemed enthusiastic about working with the crypto industry have expressed skepticism and been more supportive of Gensler’s enforcement campaign, according to a person involved in the talks.

The SEC’s $30 million settlement last week with Kraken, one of the largest US exchanges, alarmed crypto enthusiasts. Kraken agreed to stop offering a service known as “staking,” which allows investors to earn interest on their crypto savings and has been lucrative for the industry. The enthusiasts fear that the SEC may move to block other crypto firms from offering similar services.

On Monday, the New York Department of Financial Services said it had ordered Paxos to stop issuing BUSD, a popular stablecoin affiliated with Binance, the world’s largest crypto exchange. On the same day, Paxos said it had received a letter from the SEC warning that the company may soon be charged with securities violations over BUSD.

“We’re seeing an arms race between federal agencies in the United States, competing to show how tough they can be on crypto,” said Jason Weinstein, an attorney at Steptoe & Johnson who works on crypto matters. “There are many sheriffs in town, and each of them is trying to assert control over the same town.”

Some of the actions have raised fears that crypto firms may find it more difficult to develop relationships with the traditional financial system. In January, the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued a joint statement that outlined in strong terms the risks of becoming entangled in crypto.

“The administration’s efforts are no secret,” Nic Carter, a crypto investor, wrote in a widely cited blog post last week. He added that “exchanges could be completely shut off from the banking system.”

As dire predictions have spread, crypto executives have taken to Twitter to attack the SEC. A few days after Kraken settled with the agency, the company’s founder, Jesse Powell, posted an obscene meme about Gensler. It was later deleted. Kraken did not respond to a request for comment.

“There is no doubt that this moment is different,” said Mr. Grewal, the Coinbase lawyer. “Our mindset is that we are prepared to engage as long as it takes to get the rules right.”

Matthew Goldstein contributed reporting.