Intensified SEC and CFTC Action: Crypto Firms Brace

The crypto industry has experienced a surge in new investors, which has led to increased adoption. This influx of investors has also caught the attention of regulators who are concerned about potential market manipulation, investor protection, and the use of crypto for illicit activities. The United States Commodity Futures Trading Commission (CFTC) has issued a warning that it will be taking more enforcement actions against the crypto industry in the next few years.

During the 27th Annual Milken Institute Global Conference, CFTC Chair Rostin Behnam stated that with the rising prices of cryptocurrencies and the entrance of inexperienced retail investors, there will likely be another cycle of scams and fraud within the next 6 to 24 months. Currently, there is no legal framework in place to regulate crypto service providers, so the CFTC chair anticipates that regulatory bodies will crack down on crypto firms.

Both the U.S. Securities and Exchange Commission (SEC) and the CFTC have been cracking down on crypto firms since 2023, with last year recording the highest number of enforcement actions against crypto firms. The SEC, in particular, has made digital assets a top priority and has tripled the number of administrative proceedings in 2022. The regulator imposed $281 million in fines for settlements. In 2023, the CFTC took 47 enforcement actions against crypto firms, representing over one-third of its total enforcement actions since 2015.

Multiple cases are pending against U.S. crypto firms such as Kraken, Binance, and Coinbase. The U.S. Justice Department recently arrested the founders of Samurai wallet on money laundering charges, and the SEC issued a Wells notice against Robinhood in May. The focus of regulators seems to be on broker-dealers and privacy-related tools, as evidenced by enforcement actions against crypto-mixing services and privacy-focused wallet providers.

The lack of a legislative framework and clear enforcement jurisdiction has created challenges for both crypto firms and law enforcement agencies. The discrepancy between the perspectives of the CFTC and the SEC regarding regulation has created uncertainty. New crypto companies may be discouraged from entering the market, and existing companies would need to invest more in legal and compliance counsel, potentially stifling innovation.

At a time when other jurisdictions are developing comprehensive crypto regulations, the U.S. is still relying on an “enforcement first” approach. This approach has forced some established businesses to modify their offerings or shut down altogether. Despite this, traditional financial institutions are showing increasing interest in the crypto market, with the launch of Bitcoin exchange-traded funds and investment from Wall Street. Crypto holders are becoming a political force in the U.S., making the possibility of more favorable regulations more likely.