SEC Regulation of Crypto: Tensions and Changes

As the Securities and Exchange Commission’s (SEC) five voting members addressed lawmakers on Capitol Hill in September, House Financial Services Committee Chair Patrick McHenry (R-NC) challenged SEC Chair Gary Gensler regarding the perceived lack of regulatory clarity around cryptocurrency.

> “The laws are clear, and it’s written by the Supreme Court,” Gensler began, but McHenry interrupted him and sought insight from SEC Commissioner Hester Peirce on the agency’s stance.
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> “We’ve taken a legally imprecise view to mask the lack of regulatory clarity,” Peirce claimed, highlighting internal tensions within the agency over crypto regulation. She noted a desire for better guidelines that had not yet been provided.

This exchange revealed ongoing tension about the SEC’s regulatory approach, particularly regarding how much of the crypto industry is subject to the agency’s established securities rules. Gensler’s assertion that “everything but Bitcoin” falls under SEC oversight has made him a central figure in the industry, especially as the agency intensified its enforcement initiatives, penalizing various crypto firms for alleged violations.

Gensler, nominated by President Biden, indicated he plans to step down when Donald Trump starts his second term on January 20, 2025. Trump has appointed former SEC Commissioner Paul Atkins to succeed Gensler. According to Stephanie Avakian from WilmerHale, Atkins is likely to adopt a more pragmatic approach to regulation, which crypto advocates hope will lead to more favorable conditions for the industry.

However, it remains uncertain how Atkins will manage ongoing lawsuits against major firms like Binance, Coinbase, and Ripple Labs. Anthony Tu-Sekine from Seward & Kissel warned against quickly dropping high-profile cases, asserting the SEC operates like a “supertanker” that moves slowly and does not swiftly abandon efforts.

Challenges Faced by Gensler

At the start of Gensler’s term, many in the industry held cautious optimism due to his background in blockchain education at MIT. However, ongoing enforcement actions deemed overaggressive by many have isolated him from industry supporters. In November, Gensler justified the SEC’s emphasis on regulatory compliance in the crypto market, citing significant investor harm over the years. He noted that most crypto assets lack proven sustainable use cases.

In November, 18 states filed a lawsuit against the SEC, claiming violations of the law through enforcement. Political tensions escalated as Trump pledged to fire Gensler upon taking office, aligning with growing bipartisan skepticism regarding existing regulations.

Despite setbacks in court, the SEC experienced a successful year in bringing in significant enforcement penalties, amounting to $8.2 billion in fiscal year 2024. The SEC achieved a major ruling against Terraform Labs regarding the $40 billion collapse of UST and LUNA.

Conversely, it faced challenges with Ripple Labs after a judge ruled that its token, XRP, was not definitively a security. The SEC’s appeals for further penalties reflect ongoing disputes over their enforcement approach while lawsuits against exchanges Binance and Coinbase continue.

Enforcement Threats and the Future

Gensler’s resignation has followed a federal ruling against the SEC’s extended powers concerning decentralized finance regulations. Future enforcement will continue targeting companies across various sectors, including DeFi and NFTs, as indicated by recent actions against entities like Robinhood.

Katherine Snow, general counsel at Thesis, pointed out that Gensler’s leadership created a chilling effect on the crypto industry, forcing companies to either abandon projects or relocate. Upcoming years could showcase disparate strategies among various trade associations with a new SEC leader.

Edited by Sebastian Sinclair