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The US Securities and Exchange Commission has been criticized for failing to offer regulatory clarity in the crypto industry. The regulatory body has been regulating the market through enforcement, and this has done little to protect investors, given the recent fall of FTX and projects such as Terra LUNA.
SEC’s shortcomings in crypto regulations
The current chair of the SEC, Gary Gensler, believes that only Bitcoin meets the threshold of being a commodity and that all other crypto assets are security tokens. This was the same sentiment the immediate former SEC chair Jay Clayton shared.
Gensler has occasionally said that cryptocurrency exchanges and tokens must register with the regulatory body. However, a report by Forbes noted that the commission was yet to publish any registration forms, procedures, guidelines, or instructions on registering. The SEC has also failed to prove how such measures could protect investors.
The recent collapse of the FTX cryptocurrency exchange has put the SEC in the limelight. The commission tabled several charges against FTX’s founder, Sam Bankman-Fried, and his conspirators. These charges show that guidelines are already being used for the crypto industry, with some regulators asserting their jurisdiction in the sector.
The SEC Chair reportedly held meetings with Bankman-Fried months before FTX collapsed and failed to fulfill customer withdrawals. The close relationship between Gensler and Bankman-Fried enabled the latter to get a regulatory pass, with the SEC failing to uncover the fraud that was going on at the exchange.
Bankman-Fried is currently being charged with multiple counts of fraud and conspiracy. The SEC had earlier reported that Alameda’s CEO, Caroline Ellison, and FTX’s co-founder, Gary Wang, had pled guilty to several charges and were working with prosecutors on the case.
SEC ruling by enforcement
The SEC has been regulating the fast-growing crypto industry through enforcement, which has often failed to work to protect investors, with most charges ending in settlement. One of the most high-profile cases is the one involving Ripple.
Towards the end of 2020, Clayton filed a case against Ripple, claiming that its native XRP token is a security. In late 2022, the SEC and Ripple reached final arguments on the case after two years of back-and-forth.
In its lawsuit against Ripple and its executives, Brad Garlinghouse and Chris Larsen, the SEC said that Ripple sold XRP as a security for seven years. In most cases, crypto firms tend to settle with the sec to avoid expensive legal battles. However, Ripple chose to fight back, and it has managed to weaken the SEC’s arguments on the case.
The SEC’s failure to properly regulate the crypto space has also attracted the attention of US legislators who have criticized Gensler and the commission. Shortly after FTX’s collapse, Minnesota Senator Tom Emmer criticized Gensler, saying he should appear before Congress and testify over regulatory failures.
Emmer’s tweet cited the collapse of several projects and firms in 2021, including Terra, Celsius, Voyager, and FTX.
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