Strategic Federal And State Criminal Defense

The SEC sees FIT21 as inadequate

On Behalf of | May 22, 2024 | Federal Crimes, White Collar Crimes |

In response to the collapse of FTX, BlockFi, and Voyager Digital, among other crypto platforms, the SEC has intensified its enforcement of anti-fraud and securities laws in the cryptocurrency industry. In 2023, it launched 26 crypto-related enforcement actions, which some criticized as regulatory overreach. Still, SEC officials argue that increased enforcement was necessary to combat fraud, curb market manipulation, and enhance transparency among crypto holders and exchanges.

In 2023, Several senior federal House Republicans introduced the Financial Innovation and Technology for the 21st Century Act (FIT 21) in response to the rapid growth of crypto markets. It seeks to strike a balance between fostering innovation and safeguarding investors. The crypto industry typically ignores or sidesteps regulations as hampering the dynamic nature of the crypto markets. Still, noncompliance has come at a price for some, leading to high-profile fraud charges, bankruptcies, and financial misconduct.

Potential SEC actions

SEC Chair Gary Gensler issued an official rebuke to FIT21 on May 22, 2024. Instead, the SEC is considering an array of regulatory approaches to manage the complexities of the cryptocurrency market effectively:

  • Requiring cryptocurrency exchanges and tokens to register, ensuring they meet the same standards as conventional financial entities regarding disclosure, reporting, and operations.
  • Setting stringent transparency rules, the SEC could ensure that crypto businesses provide investors with thorough and accurate information about their financials, operations and the risks involved with the crypto assets they handle.
  • Enforcing anti-fraud regulations to deter deceptive practices and maintain market integrity, including rules against manipulative tactics such as wash trading and pump-and-dump schemes.
  • Expanding initiatives to educate investors about the specific risks of cryptocurrencies and establish mechanisms for addressing crypto-related investor complaints, thereby enhancing market confidence.
  • Implementing strict cybersecurity rules for crypto platforms could protect against digital threats like hacking and data breaches.
  • Collaborating with other regulatory bodies to enforce Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) laws could mitigate public security concerns associated with cryptocurrencies.
  • Monitoring trading activities can aid in the early detection of irregularities, promoting a fair and transparent marketplace.
  • Building partnerships with international regulators could lead to harmonized regulations, addressing the global nature of cryptocurrencies and streamlining cross-border enforcement.
  • Using regulatory sandboxes to test new ideas and provide feedback to regulators.
  • Clarifying policies from the IRS and state tax authorities on the taxation of crypto transactions would reduce uncertainty for all market participants.

There is a lot of uncertainty

Striking the right balance between fostering innovation and protecting investors could securely and sustainably nurture the cryptocurrency market’s growth. Still, it’s worth noting that federal courts consistently affirm that securities laws apply when crypto assets are offered or sold as investment contracts. Those trading cryptocurrency may find themselves in the crosshairs of the SEC or another federal agency. Ignoring regulations and flaunting conventions may work in the short term. Still, it is best to hedge that bet by getting legal guidance to determine the best action to avoid massive fines and potential criminal charges.