Crypto Wars: Gensler's SEC v Digital Asset Industry ⚔️
Crypto Wars: Gensler's SEC v Digital Asset Industry ⚔️
Gary Gensler's crusade against crypto has brought more scrutiny to an industry plagued by fraud and manipulation. Neither side is backing down. The future of the new finance hangs in the balance.
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US Securities and Exchange Commission has cut a bill book of $4.7 billion in 2024.
To put that number into perspective, it's a 3,000% increase from 2023.
Operation Chokepoint 2.0. Let that sink in.
The SEC has been targeting some big names in the crypto world.
The average fine $426 million—the highest ever recorded.
This big fish - $4.68 billion fine. Terraform Labs PTE, Ltd. and Do Kwon.
2024 saw 11 enforcement actions, a turning point in the SEC’s enforcement strategy.
How does it all look over the years? Over $7.4 billion in total.
Read: SEC against the world🛡️
So, what's the SEC's strategy? They're focusing on fewer, but larger cases?
Making a big splash and setting a precedent for the entire industry?
US SEC chain Gary Genser and Co. have also asked for a jumbo budget of $2.6 billion. for the 2025 fiscal year to strengthen enforcement capabilities and address staffing shortages.
The industry is not sitting quite. Crypto is fighting back. If not now, then when?
Who’s taking the US SEC to court?
1/ Coinbase
In June 2023, the SEC sued Coinbase, claiming it operated as an unregistered securities exchange. The SEC alleged that Coinbase's staking-as-a-service program was an unregistered securities offering, violating federal laws.
Coinbase’s response? Lawsuit against SEC.
In September 2023, Coinbase countered by suing the SEC and the FDIC.
FOIA Violations: Coinbase accused the SEC of not providing information on investigations and Ethereum’s regulatory status, contrary to Freedom of Information Act requirements.
Lack of Clarity: Coinbase criticised regulators for failing to establish clear rules for the crypto industry, which hampers innovation.
Banking Access: The lawsuit also challenged FDIC "pause letters" that restricted banking services for crypto firms.
How’s it going?
As of March 2024, a US District Judge allowed the SEC's case against Coinbase to proceed. This ruling affirmed the SEC's claims regarding unregistered securities sales through staking.
SEC is now asking the court for four extra months to finish gathering facts in its case against Coinbase.
2/ Consensys
On April 25, 2024, Consensys, MetaMask creators decided to take a stand and sued the SEC.
Declare Ether as a Commodity: They wanted a court to confirm that Ether isn’t under the SEC’s control.
Stop SEC Investigations: They aimed to put an end to any ongoing SEC investigations into Ethereum and their business.
Clarify Their Role: They wanted to show that Consensys isn’t acting like a broker or dealing in securities through MetaMask.
What sparked the lawsuit?
A Wells Notice. Before the lawsuit, the SEC sent Consensys a Wells Notice, hinting that they might take action over alleged issues with MetaMask’s Swaps and Staking features.
How’s it going?
A Texas federal court dismissed Consensys' lawsuit against the US SEC, stating the core argument was resolved - Ethereum ETFs were approved.
Consensys continues to face legal challenges from the SEC regarding its MetaMask product.
3/ The Crypto Freedom Alliance of Texas (CFAT)
Back in April 2024, Blockchain Association (BA) and Crypto Freedom Alliance of Texas (CFAT) filed a lawsuit against the SEC in a federal court in Texas.
Why?
New dealer rules: The SEC's new rules were set to make it tougher for people in the crypto space. They basically redefined what it means to be a dealer, which could force a lot of businesses to register and follow a bunch of complicated regulations.
In the lawsuit, the BA and CFAT slam the SEC for its "arbitrary and capricious rule making" and seek a court order to strike down the Dealer Rule.
The groups argue that the SEC has violated the Administrative Procedure Act (APA) by "unlawfully" expanding the regulator's interpretation of the term "dealer," which is part of the Securities Exchange Act of 1934.
“This is the latest example of the SEC’s blatant attempts to unlawfully regulate outside its authority, skirting legal obligations to address the numerous concerns received during its compressed comment period.” - Blockchain Association CEO Kristin Smith.
4/ Beba LLC and DeFi Education Fund's lawsuit
Beba LLC, a Texas-based apparel company, and the DeFi Education Fund (DEF), a crypto advocacy group, have jointly filed a lawsuit against the SEC.
Read: Coinbase > SEC < Beba 🤼♀️
They seek to establish that airdropped tokens should not be classified as securities.
Beba conducted an airdrop of its $BEBA token to customers for marketing purposes, but the SEC has indicated it may consider such airdrops to be securities offerings = strict regulations.
The lawsuit argues that the $BEBA token airdrop does not qualify as a security for two main reasons:
Airdrops do not involve an investment of money, which is a critical factor in determining whether an asset is a security under the Howey Test. Recipients do not pay for tokens; they receive them for free.
There is no expectation of profit based on the efforts of $BEBA or any other entity involved
The lawsuit also challenges the SEC's "unwritten policy" that nearly all digital assets and transactions are securities, arguing this violates the Administrative Procedure Act (APA) by failing to undergo formal rulemaking.
Beba and DEF are seeking a declaration from the court that the SEC violated the APA and that the $BEBA airdrop does not constitute a securities offering.
Read: Artists sue SEC over NFTs classified as securities
All of this, just a reaction of how US SEC has been treating the crypto industry of late.
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The major crypto companies that were sued by the US SEC?
The SEC settlements?
The norm for crypto companies.
Over a dozen entities settling cases in the past year, paying a total of $126 million.
Uniswap Labs, eToro, Abra, Silvergate, FalconX, Genesis, OKX, ShapeShift, KuCoin, Coinlist and the most recent one, Rari Capital.
Plus, Binance also settled with the DOJ this past year for $4.2 billion.
Rari Capita settlement marks a milestone in what some industry observers are calling 'Gensler Fall,' referencing SEC Chair Gary Gensler's aggressive approach to crypto regulation.
Read: SEC settlements are becoming the cost of doing crypto business
That’s why the SEC needs an update in its ways.
SEC Chair Gary Gensler is on the chopping block as Donald Trump promises to replace him with someone more crypto-friendly.
If it happens, Cointelegraph says there’s 5 things the new SEC chair needs to FIX:
Allow Ether funds to start staking
Staking, which involves locking ETH as collateral for rewards, is currently not permitted for spot Ether ETFs.
The SEC should create exemptions for spot Ether to facilitate staking, which would enhance investment opportunities.
Embrace on-chain compliance solutions
The SEC should adopt blockchain technology for core functions like reporting and settlement.
By issuing guidance on on-chain ledgers, the SEC can enhance regulatory efficiency and transparency.
Upgrade KYC and custody rules for Web3
Current regulations leave self-custody wallets largely unregulated.
Integrating self-custody elements into existing rules for qualified crypto custodians can improve investor protection.
Regulate decentralised exchanges (DEXs)
DEXs are currently under-regulated despite their growing popularity. The SEC should clarify which tokens are considered securities and establish a registration process for compliant DEXs.
Dollarise the digital economy with real-world assets (RWAs)
There is significant demand for tokenised dollars, and the SEC should foster an on-chain market for USD-backed RWAs.
Why? This would enhance the accessibility of digital assets while leveraging blockchain's capabilities.
SEC Commissioner Mark Uyeda's Proposal
Uyeda has suggested updating the SEC's S-1 disclosure process for cryptocurrency firms.
Why? Many crypto issuers find that the existing S-1 requirements include irrelevant information for digital assets.
Uyeda emphasises that this rigid framework does not support capital formation or investor protection.
“Many of these issuers and crypto digital assets have characteristics for which Form S-1 may technically require information that is not relevant or applicable … This approach ... is problematic because it neither facilitates capital formation nor protects investors. Consideration should be given to allowing variances from Form S-1 for crypto digital assets, similar to that given for fund and insurance products and other securities products.”
Uyeda’s proposal could lead us to a world where crypto companies get a warm welcome instead of a stern lecture.
US Lawmaker calls out SEC?
Yes. At the recent "Dazed and Confused" hearing, House members took a swing at the SEC and its chair, Gary Gensler.
Arkansas Representative French Hill expressed that Gensler's methods have created a bit of chaos in the crypto market, leading to "confusion and uncertainty."
“We’re against SEC enforcement abuse and making it hard for legitimate actors who are trying to follow the rules to do a fine job and bring innovation and technology to our markets.”
Hill proposed the Financial Innovation and Technology for the 21st Century (FIT21) Act as a friendlier alternative for regulating crypto, emphasising that they’re not against the SEC going after bad actors.
Read: Rep. Torres: SEC invented ‘crypto asset security’ out of thin air
Token Dispatch View
In the US SEC's crusade against crypto, one thing is clear: neither side is backing down.
SEC Chair Gary Gensler has made regulating crypto a cornerstone of his tenure, arguing that most digital assets are unregistered securities. The industry, for its part, sees Gensler's approach as regulatory overreach that threatens innovation.
Gensler's SEC has notched some significant victories, and a huge collection in fines through enforcements. But the crypto industry is fighting back.
Companies are increasingly taking the offensive, filing lawsuits against the SEC in crypto-friendly jurisdictions like Texas. Their strategy appears aimed at creating circuit splits that could force the Supreme Court to weigh in.
At the heart of this battle is a fundamental disagreement over how to classify and regulate digital assets. Gensler insists that most cryptocurrencies fall under existing securities laws. The industry argues that these new technologies require new regulatory frameworks.
Congress has so far failed to provide clarity, leaving the courts to sort out these complex issues. As cases wind their way through the legal system, billions of dollars and the future of financial innovation hang in the balance.
Gensler's aggressive approach has brought more scrutiny to an industry plagued by fraud and manipulation. The big argument by the supporters is that regulation-by-enforcement is creating uncertainty that could drive innovation overseas.
The future of the new finance hangs in the balance. Will the US lead the blockchain revolution, or will it be left behind?
Week That Was 📆
Saturday: Should You Invest in MicroStrategy’s Bitcoin Bet? 🍔 🤔
Friday: Ten Takeaways from Token2049 🥡
Thursday: “Recalibration” 🧮
Wednesday: Evolution of Crypto ft. Vitalik Buterin 🎙️
Tuesday: Good, Bad and Ugly of Rate Cuts 👀
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