How the SEC Crypto Regulation Brings Greater Accountability and Transparency to the Market – Cryptopolitan

by Arthur · April 12, 2023

The world of cryptocurrency has been through many difficulties in recent years. From the excitement over the crypto boom to the subsequent market crash and bankruptcy of many crypto companies, investors and regulators alike have been left with many questions about the future of this emerging industry. One organization that has been at the forefront of regulating the crypto sector is the United States Securities and Exchange Commission (SEC). With its mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation, the SEC has become increasingly involved in regulating the cryptocurrency space. This Cryptopolitan guide examines the SEC crypto regulations and their effects on the crypto and blockchain industry.

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Recent enforcement actions by the SEC

The Securities and Exchange Commission (SEC) has stepped up its efforts to crack down on unregistered securities in the cryptocurrency industry. Recent enforcement actions against Kraken and Paxos have put the spotlight on the regulatory challenges facing the sector.

Kraken, a popular cryptocurrency exchange, was forced to shut down its betting service in the US following a $30 million settlement with the SEC. The stake service involved investors unlocking crypto tokens with a blockchain validator to receive new crypto when the validator used their tokens to validate data for the blockchain. The SEC considered this an investment contract because investors reasonably expected to receive money from Kraken in exchange for joining the stake pool.

The SEC alleged that Kraken failed to make certain disclosures to investors, leading to the settlement and termination of the service. This action by the SEC has raised concerns for other proof-of-stake projects such as Ethereum, whose investors also use staking-as-a-service options.

In addition, the SEC has warned Paxos of its plans to sue them for issuing Binance USD (BUSD), a stablecoin pegged to the US dollar. The SEC claims that BUSD is an unregistered security and that Paxos did not adequately warn investors about the risks associated with investing in the stablecoin or provide proper financial disclosures. The warning has proven controversial, as experts debate whether investing in a stablecoin should be considered an investment contract. This has led the largest exchange in the country, Coinbase, to actually remove the stablecoin from its platform.

SEC Priorities for 2023

The US Securities and Exchange Commission (SEC) has recently included regulation of emerging technologies and cryptoassets as one of its priorities for 2023. This move indicates the SEC’s intention to focus more attention and resources on regulating the cryptocurrency industry, which has seen an increase in popularity the last years.

Existing crypto regulations

In November 2021, the Infrastructure Investments and Jobs Act included provisions defining digital assets and brokers, placing similar requirements on crypto exchanges as stock brokers. The law requires centralized crypto exchanges to provide investors and the IRS with 1099 forms summarizing the activity of traders, which could help investors feel more comfortable investing in crypto assets.

The IRS considers virtual currencies property, meaning crypto bought at one price and sold at a higher price may be subject to a capital gains tax. Similarly, losses resulting from crypto trading can be deducted as capital losses.

There is an interesting loophole resulting from this classification. While stocks and other securities are subject to a wash sale rule, which does not allow deductions for losses on the sale of securities that are quickly repurchased at a reduced price, this rule does not currently apply to crypto.

The SEC uses the Howey test, outlined by the US Supreme Court, to determine whether something is an “investment contract” and therefore a security. The Howey test asserts that a security is an “investment of money in a joint enterprise with a reasonable expectation that profits will be derived from the efforts of others.”

The application of this test to cryptocurrency is still up for debate. While the SEC considers some cryptoassets securities, others argue that certain tokens should not be classified as securities.

Bitcoin is a notable exception to the SEC’s securities classification, as the agency does not consider it a security. The reason for this is that investors do not invest in Bitcoin with reasonable expectations of profit. Bitcoin is seen more as a currency, similar to traditional fiat currencies.

The infamous Ripple lawsuit

The SEC’s lawsuit against Ripple Labs has been one of the most controversial and closely watched cases in the cryptocurrency industry. The SEC sued Ripple Labs in 2020 for selling its XRP token without registering it as a security, raising a debate about whether XRP should be considered a security. The outcome of the case could have far-reaching consequences for the crypto industry.

Central to the legal debate is whether XRP should be considered a security. If the court sides with the SEC, crypto exchanges will face more scrutiny from regulatory agencies and will likely have to register as securities if they continue to sell in the United States. However, if the court rules in favor of Ripple Labs, it could set a precedent for other crypto assets that are classified differently than securities.

The case has implications beyond the classification of XRP as a security. It could set the tone for how the SEC regulates the cryptocurrency industry in the future. The outcome of the Ripple lawsuit could be a turning point for the industry, shaping how regulators view cryptocurrencies and how companies operating in the industry conduct their business.

The latest in the lawsuit is an admission by the SEC’s expert that fluctuations in the prices of Bitcoin (BTC) and Ethereum (ETH) have been responsible for as much as 90% of XRP’s price swings since mid-2018. Meanwhile, there is ongoing speculation about when the summary judgment will be granted. Initially, several legal experts predicted that the issue would be decided in the first quarter of 2023.

The Ripple lawsuit has already led to some changes in the cryptocurrency industry. Many exchanges have suspended or delisted XRP trading in response to the lawsuit. Some companies have even moved their operations outside the US to avoid dealing with the SEC’s regulations.

Criticism of the SEC’s approach

The SEC’s crackdown on the crypto industry has not been without its critics. Among them is SEC Commissioner Hester Peirce, who has distanced herself from some of the SEC’s recent enforcement actions. Peirce has argued that the SEC’s approach to regulating emerging industries like crypto is not efficient or fair, and that enforcement action is not an appropriate way to determine what the law is in such an industry.

Peirce’s dissent highlights a broader sentiment among some in the crypto industry that the SEC’s securities regulations are too inflexible and not built to accommodate the unique characteristics of cryptocurrency. Many have argued that the SEC’s approach does not take into account the differences between crypto and traditional securities, and that a one-size-fits-all regulatory approach is not appropriate.

Some critics have also questioned the SEC’s willingness to use enforcement actions to establish its regulatory authority over the crypto industry. The SEC’s recent actions against Kraken and Paxos have raised concerns among some that the agency is taking an overly aggressive approach to regulating the industry.

Despite these criticisms, the SEC maintains that its actions are necessary to protect investors and ensure that the crypto industry operates in a fair and transparent manner. As the crypto industry continues to evolve and grow, it remains to be seen how the SEC will respond to new challenges and developments.

Challenges in regulating cryptocurrency

Regulation of cryptocurrencies presents a unique set of challenges, as the technology is still relatively new, constantly evolving, and often operates in a decentralized and globalized manner. The difficulty in determining the SEC’s domain over crypto and the controversy surrounding the classification of stablecoins are just some of the issues at the forefront of regulatory discussions.

One of the major challenges in regulating cryptocurrencies is determining the SEC’s domain over the industry. There is often a fine line between what is considered security and what is not.

Another problem that arises in the regulation of cryptocurrencies is the controversy surrounding the classification of stablecoins.

Stablecoins are a type of cryptocurrency that is tied to an external asset, such as the US dollar. Finally, there are questions about the disclosure requirements and standard of care for crypto issuers.

The SEC’s priorities for 2023 include investigating whether crypto companies meet standards of care when “making recommendations, referrals, or providing investment advice.” This priority highlights the need for clearer guidance on disclosure requirements for crypto issuers and the level of care they should be held to.

Conclusion

The latest SEC crypto regulation developments show the agency’s increasing attention to the cryptocurrency industry. The SEC’s enforcement actions against Kraken and Paxos, as well as the ongoing Ripple lawsuit, reflect their efforts to bring greater accountability and transparency to the market. The Securities and Exchange Commission (SEC) is getting more involved in the cryptocurrency business, as seen by recent steps taken by the agency. However, the future of cryptocurrency laws in the United States remains unclear. It is quite likely that the SEC will play an important role in determining the development of the market and guaranteeing its continued growth and success as it continues to develop.