[Feature] SEC's Crypto Crackdown: Who’s Next on The Hit List?

The crypto bulls seemed to have returned for a period of time since last month when there was a price hike and you can almost hear the world of cryptocurrency cheering. Alas, some good things never last. As regulatory fears permeate the market, the crypto world has gone along inevitably on a bumpy ride.

A lot of cryptocurrencies are affected, resulting in a significant loss in overall industry valuation. At the time of writing, based on CoinMarketCap's data, the global crypto market is $1,00 trillion, a -1.26% change over the last day. As of yesterday at a certain point, it plummeted below the $1 trillion cap to stand at $997.98 billion.

Source: CoinMarketCap

Just a month ago, the United States (U.S.) Securities and Exchange Commission (SEC) sued Genesis Global Capital and Gemini for the unregistered offer and sale of securities that are linked to their collective Gemini Earn programme which collapsed after FTX crumbled.

SEC Chairman Gary Gensler mentioned in a statement that, "We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors. Today's charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws…It's not optional. It's the law.”

Gemini co-founder Cameron Winklevoss announced on Twitter last week that a deal had been reached on a plan to reimburse Earn users.

Next in line on SEC's hit list was Kraken. The regulator announced last week that it had hit Kraken with a $30 million fine with orders to shut down its staking programme, which offered rewards if investors locked in their holding of certain digital assets. Gensler expressed that, "Whether it's through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors' tokens, need to provide the proper disclosures and safeguards required by our securities law.”

Kraken then stated in their blogpost that they have agreed to end the on-chain staking services for U.S. clients, and it applies to all staked assets except for staked Ether (stETH) which will be unstaked after the Shanghai upgrade.

In an interview with CNBC, Gensler pointed out that Kraken was not disclosing to the public the complete risks associated with staking their digital assets on the platform, and that it neglected to register on the SEC website for the necessary regulatory requirements despite knowing how to do so.

In response, Coinbase's chief legal officer Paul Grewal and Kraken CEO Jesse Powell took to Twitter to criticise the SEC's latest enforcement action against crypto staking.

Another figure who has been at loggerheads with the SEC, Brian Armstrong, co-founder and CEO at Coinbase, also tweeted with regard to the same.

As one of the most affected by Kraken's crackdown since it has a large share of the staking market, Armstrong tweeted that Coinbase will "happily defend this in court if needed" and also published a blogpost making the case that their staking is not a security.

In Armstrong's latest tweet, he is in Washington, D.C. to discuss with regulators about crypto regulation.

Algorand Foundation's CEO Staci Warden told CoinDesk TV's "First Mover" yesterday that had the SEC laid out clear guidelines, Kraken and its staking-as-a-service platform could have been within the purview of the regulatory agency. She continued that "It's not the regulation so much, it's the way that regulation is taking place… They are trying to do the right thing (in reference to Kraken and Coinbase) and with some better regulatory clarity upfront, they would have, in my view, probably done exactly what the SEC needed them to do.”

Paxos was the next to get into SEC's crosshairs. At the end of last week, it was reported that Paxos was facing a lawsuit from the SEC for the offering of Binance USD (BUSD), which was deemed an unregistered security. Yesterday, Paxos released a statement on its website that it will cease issuing "new BUSD tokens as directed by and working in close coordination with the New York Department of Financial Services (NYDFS)." It will be effective from 21 February.

Changpeng (CZ) Zhao, CEO of Binance, also took to Twitter as seen below.

A Binance spokesperson confirmed in a statement to Insider yesterday that Paxos had been ordered to cease minting of the coin by the NYDFS. The spokesperson added that, "Given the ongoing regulatory uncertainty in certain markets, we will be reviewing other projects in those jurisdictions to ensure our users are insulated from further undue harm.”

In a 14 February analysis by Matrixport's head of research Markus Thielen, he believes that the recent scrutiny of BUSD and Paxos is not a direct attack on stablecoins. He added that the issuer of the BUSD, Paxos Trust Company, may not have been stringent enough with its oversight of the token, "Paxos had violated its obligation to conduct tailored, periodic risk assessment and due diligence of Binance and Paxos-issued BUSD customers.”

He went on to urge the industry not to be too concerned about BUSD's future, "Binance has shot itself a little bit in the foot here, but they are working on it and it should be resolved. So should we be really worried? I don't think so. Is the peg breaking? NO. We are no longer in a bear market where you worry about downside, in bull markets, you focus on the upside.”

USD coin (USDC) issuer Circle's chief strategy officer and head of global policy Dante Disparte chipped in, saying that "Circle maintains that USDC is a regulated dollar digital currency issued as a stored value under U.S. money transmission law," to Cointelegraph. Interestingly, it was reported by Bloomberg that Circle filed a complaint (in autumn 2022) to NYDFS about BUSD not being fully backed prior to the crackdown.

The matter of fact is that U.S. regulators are cooperating and working together to crack down on crypto companies and their products, and the move against Paxos is the latest in an escalating regulatory crackdown. What does this entail for the rest of the industry and who will be next on their hit list?