3 - 4 minute read
The Securities and Exchange Commission (SEC) has taken a more aggressive approach towards regulating the crypto industry in recent years. In December 2022, the agency brought charges against Caroline Ellison and Gary Wang, former CEO and co-founder of FTX respectively, in a case that could potentially lead to the SEC targeting centralized crypto exchanges.
In its complaint against Ellison and Wang, the SEC referred to FTX’s native token FTT as an “illiquid crypto asset security,” implying that the agency views all crypto assets as securities, regardless of how they are offered or sold. This marks a shift in the SEC’s approach to security regulation and could lead to greater regulatory efforts in the crypto industry.
Implications for Crypto Exchanges
If the SEC can convince courts to agree that crypto tokens like FTT are securities regardless of how they are offered, the agency would be able to go after any intermediary that sells these tokens, including major crypto exchanges like Coinbase, Kraken, and Binance. These exchanges could be exposed to significant legal liability and either forced to participate in registered exchanges like the New York Stock Exchange or shut down.
The SEC’s pursuit of securities fraud charges against FTX follows its recent success in regulating blockchain-based platforms. Last month, the agency defeated blockchain-based publishing platform LBRY in federal court and got a judge to imply in his ruling that LBRY’s native token LBC could be considered a security. This decision provides a major step forward in the SEC’s efforts to label all tokens as securities and could lead to greater regulatory efforts in the crypto industry.
Possibility of Banning Crypto Exchanges
However, it is worth noting that the SEC has not yet taken any action to ban crypto exchanges, and it is unclear if it will ultimately do so. The agency has previously stated that it is open to considering applications for cryptocurrency-based exchange-traded funds (ETFs) and has approved a few such applications, indicating that it is willing to work with the industry to find regulatory solutions.
In November 2022, the SEC instituted administrative proceedings against American CryptoFed DAO LLC, a Wyoming-based organization, to determine whether a stop order should be issued to suspend the registration of the offer and sale of two crypto assets, the Ducat token and the Locke token. The SEC’s Enforcement Division alleges that a Form S-1 registration statement filed by American CryptoFed on September 17, 2021 failed to contain required information about the company’s business, management, and financial condition, and contained materially misleading statements and omissions. The Enforcement Division also alleges that American CryptoFed failed to cooperate during its examination of the registration statement.
Caution for Investors
While the SEC’s recent actions suggest that it is taking a more aggressive approach towards regulating the crypto industry, it is still too early to say if the agency will ultimately ban crypto exchanges. It is important for investors to continue to be cautious and carefully consider the risks before investing in crypto assets.
As of late December 2022, the SEC’s administrative proceedings against American CryptoFed are still ongoing. The agency’s enforcement action against the Wyoming-based organization highlights its commitment to protecting investors from misleading information and ensuring that companies comply with the disclosure requirements of federal securities laws. The SEC’s pursuit of securities fraud charges against FTX and enforcement action against American CryptoFed indicate that the agency is taking a more aggressive approach towards regulating the crypto industry and could potentially target centralized crypto exchanges in the future. However, it is worth noting that the SEC has not yet taken any action to ban crypto exchanges, and it is unclear if it will ultimately do so.