The U.S. Securities and Exchange Commission this week said it filed 434 new enforcement actions in its fiscal year ending Sept. 30, an increase of 7% over the previous year, with “first-of-their-kind actions” including a case involving securities using decentralized finance (DeFi).
Interest in cryptocurrencies and DeFi from retail and institutional investors alike has soared this year. Regulators around the world, too, are paying closer attention as they grapple with regulating the nascent industry to protect consumers while allowing the innovations to flourish. Although the SEC is a U.S. federal agency, its reach has a far-reaching impact in the crypto industry that has no borders.
The securities markets regulator said it ordered US$3.85 billion in penalties and disgorgement in fiscal year 2021, down from US$4.68 billion in the fiscal year 2020, although standalone enforcement actions rose.
The SEC’s list of enforcement actions included investment bank Goldman Sachs over the 1Malaysia Development Berhad (1MDB) bribery scheme, which resulted in Goldman Sachs paying more than US$1 billion to settle charges, as well as General Electric for allegedly violating anti-fraud, reporting, disclosure controls and accounting controls.
“Emerging threats” in the crypto industry were singled out in the SEC’s report. Cryptocurrency exchange Poloniex, which was charged for allegedly operating an unregistered trading platform, paid more than US$10 million to settle charges. In September, crypto lending platform BitConnect and its founder Satish Kumbhani were charged for allegedly defrauding retail investors out of US$2 billion in a “Lending Program.”
The agency also took action — its first involving securities using DeFi — against two Florida men and their Cayman Islands company Blockchain Credit Partners for allegedly raising US$30 million from the unlawful sale of securities using smart contracts and DeFi technology.
The SEC is currently embroiled in heated litigation with blockchain payments company Ripple Labs over an alleged unregistered securities offering of XRP worth over US$1.38 billion. The lawsuit, filed in December 2020, also names Ripple’s CEO Brad Garlinghouse and executive chairman Chris Larsen as co-defendants for allegedly aiding and abetting Ripple’s violations. At the heart of the SEC’s lawsuit is whether transactions involving XRP constitute “investment contracts” and therefore securities subject to registration under Section 5 of the Securities Act of 1933. Ripple has argued that the SEC failed to give fair notice that XRP transactions violated the law.
Following the SEC lawsuit, the price of XRP fell by more than 50% and many exchanges delisted or suspended trading of XRP. MoneyGram, the world’s second-largest money transfer service, also suspended its partnership with Ripple. The lawsuit is being closely watched by crypto companies and investors alike for its potentially far-reaching implications on whether other tokens, too, might be deemed securities in violation of the law.
See related article: Judge makes XRP holders ‘friends of court’ in SEC’s lawsuit against Ripple
More recently, the SEC this month filed an action against Terraform Labs and Do Kwon, its co-founder and CEO, to compel documents and testimony from the company and its founder. “The SEC pretty much has sole discretion if they think there’s been a violation,” Todd Cipperman, managing principal of Cipperman Compliance Services, told Forkast.News. “Generally speaking, it’s really tough to wriggle out of this. Even if Terraform and Kwon didn’t comply, the SEC could seek a default judgment, which would make fundraising and doing business in the U.S. extremely difficult.”
Also this month, the SEC rejected global investment manager VanEck’s Bitcoin spot exchange-traded fund application citing the possibility of fraud and the need to protect investors and public interest. The SEC, however, has approved Bitcoin futures ETFs, with the ProShares Bitcoin Strategy Fund, Valkyrie Bitcoin Strategy Fund and VanEck’s Bitcoin futures ETF already live.
More regulatory oversight is also expected for stablecoins, with the SEC, together with its sibling agency, the Commodity Futures Trading Commission, intending to “deploy the full protections of the federal securities laws and the Commodity Exchange Act to these products and arrangements,” said Gensler in a statement on the President’s Working Group Report on Stablecoins.
See related article: A look at how global stablecoin regulations are evolving
“The SEC’s Enforcement Division is the cop on the beat for America’s securities laws,” said Gary Gensler, SEC Chairman, in a statement. “As these results show, we go after misconduct wherever we find it in the financial system, holding individuals and companies accountable, without fear or favor, across the $100-plus trillion capital markets we oversee.”