After the Crypto Crash Comes the SEC Crackdown
It’s been a tough few months for some people who have had it easy for a long time. A growing number of cryptocurrency operations could finally face some consequences for their alleged illegal actions.
On Monday, the Securities and Exchange Commission indicted 11 people behind Forsage, calling it a $300 million Ponzi scheme disguised as a smart contract scheme. This was less than a week after the New York Times reported that crypto trading platform Kraken was under investigation by the Treasury Department for violating US sanctions on Iran. And days before, the FBI and a US prosecutor in New York charged three former Coinbase employees with insider trading.
Which agency is responsible for regulating cryptocurrency is unclear. The Commodity Futures Trading Commission and the SEC claim jurisdiction here. The SEC, however, seems particularly interested in prosecuting crypto schemes that fall under its purview – which seems to be most of them.
“The SEC is in the midst of an ongoing attack on crypto firms from all directions,” John Reed Stark, a cybersecurity expert and former SEC attorney, told Recode. Stark noted that the agency has expanded its crypto unit and that SEC Chairman Gary Gensler has made no secret of his belief that many cryptocurrencies are securities and that he intends to regulate them as such.
So, even though it is warm outside, we are in the midst of a crypto winter that may never end. During the pandemic, the cryptocurrency market soared to $3 trillion, helped by new platforms that made investing easy enough for almost anyone. Since last November, however, the market has collapsed. It is now worth around a third of what it was at its peak, and there are no signs that the value will rebound significantly anytime soon. The crash devastated some of the companies operating in this space – and their customers too.
Now the law is coming for some crypto companies and their executives. But it remains to be seen exactly what consequences, if any, many of these companies and the people behind them will face.
Unlike traditional banks, when crypto lending platforms fail, there is no protection in place to ensure investors are compensated. Two crypto lending platforms, Celsius and Voyager, went bankrupt in July, and their customers may never get their money back. Some supposedly safe crypto investments called “stablecoins,” which are pegged to the value of a fiat currency like the US dollar, have also proven to be not very stable at all. Last May, the value of stablecoin Terra plummeted, dragging the Luna coin, whose value was tied to that of Terra, with it. Luna was once worth up to $116. Now that’s worth a fraction of a penny.
But as investor losses mount and the expansive crypto weapons of law enforcement get to work, it looks like a day of reckoning is finally coming for some of these companies, which operate in a space with few rules. . Outright scams, of course, didn’t follow the rules at all. But some of the more legitimate companies would also play fast and free with them.
“The arrogance and hubris in the crypto space is so beyond measure,” Stark said. “They are always belligerent, combative and call the SEC vague.”
“I’ve never seen anything like it and I’ve been practicing for over 30 years,” he added.
Again, the SEC is just one of many government agencies tackling crypto. And when many people lose a lot of money, the government will pay even more attention to it. But it can’t do much for some people because crypto isn’t regulated like traditional banks and securities – something many crypto investors didn’t realize until it was too late. .
“With so much new money inflating token values, so many people wanted to enter without understanding anything about the space,” said Matt Binder, a reporter for Mashable which also hosts Scam economy, a podcast dedicated to crypto and Web3 scams. “And the industry has taken advantage of a lot of those people.”
It didn’t help that some of their favorite celebrities endorsed these projects, or that some of these companies apparently had so much money they could buy ad space on the most expensive show in town. It also didn’t help that crypto became as easy to buy as an ATM transaction. And it really didn’t help that a lot of people got into crypto knowing little, but assuming they would have the same protections as more regulated institutions like traditional banks and investment firms.
Stark predicts that we’ll see more action against these crypto companies in the months and years to come, with the SEC focusing its efforts not on petty crooks, but on the gatekeepers they use for their scams: “trade , platforms, whatever you want to call them.And he thinks that and all the other agencies investigating the crypto world will get a lot of help, maybe from people on the inside.
“When companies start engaging in this stuff, you get people wanting to be whistleblowers or they become complainants,” Stark said. “And when criminal prosecutors start snooping, people can become informants very quickly.”
Molly White, who has chronicled various Web3 failures on Web3 Is Going Just Great, isn’t yet so sure that the increased scrutiny, investigations, and accusations will bring about real change.
“Insider trading charges seem like a drop in the bucket compared to the amount of insider trading known to occur at Coinbase and elsewhere, but that’s at least something,” she said. “It worries me how slow these actions are in an industry where people can perpetrate scam after scam in the meantime.”
“I will believe there is progress when I see it,” she said.
If regulators can’t make this progress in court, perhaps at the very least all the attention the crypto crash has garnered will discourage would-be investors from putting money into a volatile market they don’t understand. really and offers them little protection.
“I think these crackdowns can help drive the public away from crypto,” Binder said. “Some companies will try to ‘go legit’, but at the end of the day they are still a crypto company, selling the dream of getting rich through speculative asset exchanges, with no real product or service.”
It won’t do much, however, for people whose dreams have already turned into nightmares. White said that while some of the previous crypto loss stories were more fun and the victims were less sympathetic (see: “All My Apes Gone”), that is no longer the case. “Now we see people to write letters to a bankruptcy judge about how they are financially ruined and contemplating suicide,” she said.
Or, as Binder put it, “We have a few people who won the lottery and a ton of others who lost everything.”
This story was first published in the Recode newsletter. register here so as not to miss the next one!