US market regulators have warned the crypto industry, saying they will crack down on violations such as insider trading and fraud with the same vigor with which they pursue them in traditional finance.
In recent weeks, the Securities and Exchange Commission has filed charges against individuals for allegedly creating a $300 million “fraudulent crypto pyramid and Ponzi scheme”, as well as a case against a former employee of the Coinbase crypto exchange.
Agency officials, including its chairman Gary Gensler, are wasting little time as this year’s turmoil in digital asset markets has left investors facing deep losses. Although large swathes of the market are unregulated, the SEC uses pre-existing rules in traditional finance to control the crypto market.
“In traditional finance, these guys are under a microscope,” said Charley Cooper, chief executive of blockchain firm R3 and former chief of staff at the Commodity Futures Trading Commission, the US derivatives regulator. . He said, by contrast, that many crypto traders “were not careful” assuming the rules would not apply.
The SEC’s case against the former Coinbase employee and his associates resonated because the regulator’s claims are based in part on at least nine tokens identified as securities.
Stocks, bonds and other securities fall under the purview of the watchdog, but there is heated debate over the extent to which crypto tokens should fall under this umbrella. The former Coinbase employee said he was “innocent of any wrongdoing”, while the exchange said it had “zero tolerance for this type of misconduct”.
The case “brought the issue of potential insider trading and wire fraud to the forefront of the minds of all crypto companies, to ensure they have adequate policies and procedures in place to prevent insider trading,” said Teresa Goody Guillén, partner at BakerHostetler, an American company. law office.
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The biggest exchanges say they have long-standing confidentiality obligations to employees. A Binance spokesperson said each employee is “issued a 90-day hold on all investments they make and company executives are required to report all trading activity on a quarterly basis.”
Coinbase said the exchange has had privacy obligations in place for employees since 2012 and formal digital asset exchange policies in place since 2018 – six years after the exchange was founded. Bitfinex said it has “appropriate” policies and procedures in place against insider trading. Several other major crypto exchanges, including FTX, did not respond to requests from the FT for information on policies in place to identify or mitigate insider trading.
Recent SEC cases have also ruffled feathers in Washington, where lawmakers are debating the regulatory framework for crypto assets but have yet to find a consensus.
In the absence of specific rules, Gensler has repeatedly lobbied his agency to lead the US approach to crypto, arguing that many digital assets are securities. To support his argument, he cited cases and precedents established in US law decades ago.
The charges against the former Coinbase employee were “a stark case of ‘regulation by enforcement,'” CFTC commissioner Caroline Pham said last month. “The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is for regulators to work together.”
And while the SEC is staking out territory, some Washington lawmakers are also looking to limit its influence in the crypto industry.
On Wednesday, Senators Debbie Stabenow and John Boozman sponsored a consumer protection bill that would give the CFTC exclusive jurisdiction over digital goods exchanges. While few expect the bill to become law, observers say the proposal is likely to influence other laws in the future.
Peter Fox, a partner at Scoolidge, Peters, Russotti & Fox, said he had been expecting a crackdown from the SEC for some time.
“I suspect they kind of held their fire over the winter when asset prices were very high and a lot of these companies were very popular and the stock exchanges were in the middle of a big advertising blitz. . . I just think the timing of this lawsuit is no coincidence.
A securities litigator formerly employed by the SEC said the regulator “tends to be more focused” during times of market turmoil, to “avoid public criticism that there is somehow on the other a problem of market integrity”.
But others point out that the vacuum created by a lack of regulation meant the SEC, as America’s most powerful market regulator, had no choice but to act.
“If they don’t, you won’t have anyone left to take punitive action other than the Justice Department,” said Charlie Steele, a former U.S. government attorney and now a partner at Forensic Risk Alliance, a firm regulatory advice. “It highlights the need for these prudential regulators to understand this.”
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