Cryptocurrencies are Facing Regulatory Scrutiny as SEC Increases Pressure

Sherman & Howard L.L.C.

Sherman & Howard L.L.C.

The Security and Exchange Commission (SEC) continues its effort to regulate cryptocurrencies, claiming that most crypto tokens should be categorized as securities and fall under the SEC authority. Thus far, the SEC has labeled as securities only a little over a dozen crypto tokens.

Since assuming the position as the SEC Chair in 2021, Gary Gensler has been adamant about regulating the crypto market, claiming that in his 40 years of experience, he had “never seen a field that is so non-compliant with laws written by Congress and confirmed over and over again by the courts.” Pressure on the SEC to intervene in the crypto market has intensified after the collapse of FTX, which led the crypto market into a downward spiral, and hurt investors’ confidence.

In an effort to regulate the crypto market, the SEC sent a Wells Notice (an enforcement action notification) to the cryptocurrency giant Coinbase Global, Inc., arguing that the platform has allegedly violated investor protection laws. The lawsuit could be regarded as the SEC’s largest move to assert jurisdiction over crypto and may carry potentially existential consequences for other players in the crypto world. The SEC could seek injunctions, cease and desist orders, and penalties that may jeopardize Coinbase’s ability to operate. Coinbase, on its part, accused the SEC of stifling innovation and claimed its confident in a successful defense of these claims, not just for Coinbase but for crypto as a whole. To date, none of the crypto assets listed on Coinbase are registered with the SEC as securities.

Congress also seems divided on the appropriate role for the SEC in regulating the crypto market. While some support Mr. Gensler and the claim that the law on cryptocurrencies is clear, others point out that the SEC is "punishing digital-asset firms for allegedly not adhering to the law when they don’t know it will apply to them." (Rep. Patrick McHenry (R., N.C.), chairman of the House financial-services panel).

The regulatory debate over the future of cryptocurrencies comes at a time when the fall of Silicon Valley Bank and the recent financial uncertainty in the U.S. has enhanced the appetite for cryptocurrencies, which are referred to as an alternative to the conventional banking system. Thus, the SEC efforts, the pending Coinbase suit, and the uncertain U.S. market conditions may determine the future regulatory framework of the cryptocurrency market.

Crypto Faces Legal Reckoning as SEC Prepares Action Against Coinbase Potential lawsuit against largest U.S. crypto-trading platform could upend investors’ access.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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