SEC Signals Crypto Crackdown with Beefed Up Enforcement Arm

    Gensler's Ramp Up Sets Tone for Global Regulators

    SECCryptoUnitExpansion

    Gary Gensler means business. 

    That’s the takeaway from the news yesterday that the U.S. Securities and Exchange Commission is increasing the headcount of its newly formed Crypto Assets and Cyber Unit to 50 positions from about 30. The unit is concentrating on enforcing securities laws in all aspects of crypto. from trading to lending to NFTs to custody.

    “The U.S. has the greatest capital markets because investors have faith in them,” Gensler, the SEC’s chairman, said in a statement released by the commission on May 3. “As more investors access the crypto markets, it is increasingly important to dedicate more resources to protecting them.” 

    ‘Ominous’

    Crypto supporters didn’t exactly applaud the news. 

    “The SEC is a regulatory agency with an enforcement division, not an enforcement agency,” tweeted Hester Peirce, one of the SEC’s four commissioners. “Why are we leading with enforcement in crypto?”

    Alexander Grieve, vice president of government relations firm Tiger Hill Partners, described the tone of the SEC release as “ominous.” He said the agency is “seemingly not focused on policing fraudulent practices” and instead “focused on ‘protecting investors’ from everything that the SEC views as currently unregistered securities or securities platforms (aka everything in crypto).”

    Gensler hasn’t been shy about asserting that the SEC has an important role to play in making sure the crypto industry doesn’t become a lawless market that victimizes unwitting investors. In 2021, he said crypto firms are essentially offering customers securities and investment contracts covered by existing securities laws. He urged crypto players to register with the SEC and comply with disclosure rules and cease operating “outside the perimeter.” 

    Now the commission appears to be taking the next step by intensifying a crackdown on securities law violations across the digital asset sector, including “crypto asset lending and staking products; decentralized finance platforms; non-fungible tokens; and stablecoins.”

    Setting the Tone

    The SEC’s expansion may foreshadow similar moves from regulators worldwide, said Michael Bacina, a partner with Piper Alderman, an Australian law firm. He said it was encouraging to see a regulator building up its staff to focus on blockchain technology and protect consumers in a market that is rife with concern. “The SEC sets the tone for regulators globally,” Bacina told The Defiant.

    Indeed, the SEC’s push comes as other regulators are also tightening the screws. On March 31, the European Parliament’s Committee on Economic and Monetary Affairs supported strengthening rules on Know-Your-Customer practices for virtual asset service providers. Two other EU institutions must approve the legislation before it becomes law.

    Gensler Vows Action Against DeFi Platforms That Operate ‘Outside the Perimeter’

    Meanwhile, the Biden Administration is working on a new oversight regime for the cryptoo industry. 

    The SEC’s crypto division has brought more than 80 enforcement actions on “fraudulent and unregistered crypto asset offering and platforms” since 2017. Its director, Gurbir Grewal, said that the recent explosive popularity of the crypto markets has resulted in “retail investors bearing the brunt of abuses” in the space.

    For all the hand wringing, there are those in the crypto community who welcomed beefing up the division. 

    Resources and Skills

    “Given how specialized this space is, it’s good to see that the SEC is acquiring the necessary resources and skills, and that it has the full backing of the White House,” Graeme Fearon of Moulis Legal, a legal firm with experience in blockchain, told The Defiant. “There have simply been too many examples of fraud and bad actors for governments to be able to turn a blind eye.” 

    He said current legislation around the world is poorly suited to regulate such a novel technology. Serious players want regulation because it will turn the wild west into a safe and mature marketplace.  

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