SEC Lawsuits and Regulatory Crackdown on Crypto in 2024

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As someone who has been closely watching the crypto space for several years now, I can’t help but feel a mix of amusement and concern when I reflect on the events of 2024 in the world of digital assets. It seems that the Securities and Exchange Commission (SEC) has taken a more aggressive stance towards cryptocurrencies this year, with high-profile targets like Coinbase, Binance, and Rari Capital finding themselves embroiled in legal battles.

In 2024, the Securities and Exchange Commission (SEC) continued to be seen as a major adversary within the U.S. cryptocurrency sector, intensifying its regulatory actions. Throughout the year, the agency imposed unprecedented fines on various crypto businesses.

Looking ahead as we anticipate a possible shift in the Securities and Exchange Commission’s (SEC) regulatory approach under Donald Trump’s upcoming administration, let’s review how the agency has been monitoring cryptocurrency businesses throughout this year.

Record-Breaking Fines Highlight SEC’s Stance on Crypto

2024 saw a shift in the regulatory strategy, characterized by reduced enforcement actions yet hefty penalties. For instance, the Securities and Exchange Commission (SEC) levied a total of $8.2 billion in fines against 583 cryptocurrency businesses that year.

This size exceeds the total penalties accumulated over the last twelve years. What’s surprising is that such a significant growth stemmed from only eleven instances, each associated with significant financial wrongdoing.

One of the most significant cases revolved around Terraform Labs. Its founder, Do Kwon, faced accusations of orchestrating one of the largest securities frauds in US history. Following a jury trial in Manhattan, Terraform Labs settled with the SEC for $4.5 billion. 

According to a post by the SEC from June, Terraform Labs PTE, Ltd. and Do Kwon consented to pay over $4.5 billion after a jury decision found them responsible for a multi-year fraud. This fraud involved cryptocurrency assets that were classified as securities. The fraud resulted in significant losses for investors when the scheme eventually collapsed.

As a researcher examining the situation, I can share that Terraform, having recently declared bankruptcy in January, intends to prioritize reimbursing cryptocurrency investors during its liquidation phase. This is to be accomplished before addressing any settlement obligations with the Securities and Exchange Commission (SEC).

The firm estimates that eligible stakeholders may recover between $184.5 million and $442.2 million, leaving much of the settlement amount unpaid.

Fraud Cases Dominate SEC’s Enforcement Actions

In their investigations, the SEC focused on multiple instances of fraud, with Touzi Capital and its owner, Eng Taing, being particularly notable. Touzi Capital managed to gather more than $100 million from investors under the premise of providing secure, lucrative crypto mining operations and debt recovery initiatives.

Yet, the SEC claimed that the funds were improperly used and channeled towards unrelated ventures, gaining personal profit.

The lawsuit alleges that the company’s Bitcoin mining activities were affected by unpredictable energy expenses and equipment malfunctions, contradicting their marketing promises of dependability and profitability. Consequently, the SEC is pursuing permanent restraining orders, monetary fines, and a prohibition against Taing holding any executive or director position in future companies.

A significant event also featured BitClave, a blockchain company that faced accusations of breaching securities regulations during their Initial Coin Offering (ICO) in 2017. As a result, funds amounting to $4.6 million were distributed by the Securities and Exchange Commission (SEC) to investors from the BitClave Fair Fund.

This fund provided compensation for individuals impacted by the failure of the company’s Consumer Activity Token (CAT) product line.

Crypto Firms Push Back Against SEC Lawsuits

The SEC’s lawsuits have been effective in combating scammers and fraudsters. Nevertheless, leaders within the cryptocurrency sector often express disapproval due to the unclear regulations and enforcement-based approach. For example, the SEC has initiated legal proceedings against numerous crypto exchanges, classifying crypto transactions as securities.

The SEC lawsuits and enforcement actions prompted significant resistance from major players in the crypto industry. Crypto.com, after receiving a Wells notice in October, preemptively sued the agency. 

Kris Marszalek, the CEO of our company, voiced his disapproval towards the regulator’s viewpoint, arguing that it inappropriately classifies many cryptocurrency transactions as securities. This practice, which has been consistent during Gary Gensler’s leadership, is a point of contention.

Initially, Crypto.com had filed a lawsuit against the SEC, but then withdrew it in December after Kris Marszalek held discussions with President-elect Donald Trump. There’s optimism within the industry that the stance of the SEC on crypto might change under the new leadership of Paul Atkins.

Despite the impending change in administration, the Securities and Exchange Commission (SEC) has continued to issue Wells notices. Interestingly, Crypto.com feels so assured that the SEC may face limitations under the new government that they decided to withdraw a lawsuit against the agency – on the very same day their CEO met with President Trump, as reported by crypto researcher Molly White on platform X (previously known as Twitter).

Additionally, Binance and its ex-CEO, Changpeng Zhao, have taken steps to contest the Securities and Exchange Commission’s (SEC) regulatory stance. They submitted a motion to dismiss an amended lawsuit, stating that the SEC did not establish clear guidelines for identifying when cryptocurrency transactions are considered securities.

The legal team pointed out discrepancies between previous court decisions, such as the well-known SEC versus Ripple case, where it was established that XRP should not be considered a security under any circumstances.

Kraken also disagreed with the SEC’s assertion that cryptocurrencies like Cardano (ADA) and Solana (SOL) are considered securities. Using the Howey test, Kraken countered by stating these assets do not fit the criteria for investment contracts. Furthermore, they accused the SEC of exceeding their regulatory boundaries.

According to Sander Gortjes, co-founder of HELLO Labs, Gensler’s policy leaned towards an extreme, but it’s uncertain if we will swing to the opposite extreme. However, there seems to be movement towards a balanced approach and guidelines/adoption from the SEC. (BeInCrypto)

Legal and Financial Repercussions for DeFi Protocols

As a financial analyst, I’ve observed that the Securities and Exchange Commission (SEC) has expanded its focus to include Decentralized Finance (DeFi) protocols. In this context, Rari Capital is under scrutiny for alleged deceptive practices towards investors and the operation of unregistered investment products.

At its maximum, Rari governed more than a billion dollars worth of cryptocurrency assets via its ‘earn’ and ‘fuse’ pools. These pools offered an automated rebalancing feature to ensure the highest possible yields.

Yet, the SEC argued that the company’s assertions about these processes were disputed because they frequently needed human involvement.

As a researcher, I found myself delving into the actions taken by the Securities and Exchange Commission (SEC). Their reach extended to individuals like Vy Pham, who was accused of illegally peddling unregistered securities, specifically Saitama Inu tokens. According to allegations, Pham deceived investors by exaggerating the token’s worth and potential profits, thereby enriching himself at their cost.

Besides taking enforcement measures, the SEC also found itself involved in lawsuits instigated by cryptocurrency companies. For instance, Bitnomial – a derivatives exchange based in Chicago – filed a lawsuit against the SEC. The exchange contended that its XRP futures contracts are under the authority of the Commodity Futures Trading Commission (CFTC), not the SEC.

A Landmark Victory Against Coinbase

Previously this year, a court decision was made in favor of the SEC, enabling their legal action against Coinbase to advance towards trial. The crux of the matter revolves around accusations that the platform conducted unauthorized sales of securities.

In simpler terms, U.S. District Judge Katherine Polk Failla has decided that the transactions under scrutiny fit into a pattern of identification used by courts for many years, thereby strengthening the Securities and Exchange Commission’s (SEC) control over cryptocurrency platforms.

The verdict from this court case might significantly influence the entire sector, as it will challenge the boundaries of the Securities and Exchange Commission’s (SEC) authority and clarify the legal category of digital currencies.

2024 saw the Securities and Exchange Commission (SEC) taking a stricter approach towards the cryptocurrency sector, marking a heightened enforcement effort. Nonetheless, with a new administration that appears more favorable towards cryptocurrencies, there is optimism within the industry and among its members that the SEC’s stance will undergo substantial shifts in the future.

According to Maksym Sakharov, co-founder of WeFi, Gary Gensler didn’t start the SEC’s crackdown on cryptocurrencies in the US. Instead, he intensified the enforcement actions more than his predecessors did. As a pro-crypto chairman, Paul Atkins is expected to take a different approach, fostering collaboration with the crypto and financial sectors.

The significant digital currencies like XRP are currently surging due to this optimistic outlook. However, it won’t be until the following months that we can truly understand the full extent of these transformations.

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2024-12-26 14:14