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The U.S. Crypto Crackdown May Restructure the Sector

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Gary Gensler has long been recognized as one of the main adversaries of the American crypto community. The Securities and Exchange Commission (SEC) chair has frequently discussed the risks associated with cryptocurrencies and the necessity for strict industry regulation over the previous few years.

Yet Gensler’s hostility toward cryptocurrency has only increased since the FTX crash in November. Gensler has used his own authority to take action against the business as Congress has made little progress in crafting a regulatory framework for cryptocurrencies. The SEC has accused numerous significant cryptocurrency companies of breaking securities rules during the past few months.

Gensler’s measures, according to many crypto experts, are limiting innovation and pushing crypto businesses overseas. Some, though, contend that Gensler’s strategy will identify dishonest people and legitimize a highly stigmatized and risk-averse business. Whatever happens next, Gensler’s actions mark a significant turning point for crypto.

Kristin Smith, the CEO of the Blockchain Association, a crypto advocacy group, said that:

It certainly feels like a crypto carpet-bombing moment. The lawyers are seriously debating whether or not the United States is the right location to establish some of these crypto activities as they analyze this space.

Federal assault

The argument over whether cryptocurrencies should be classified as securities or commodities is at the center of this conflict. The Securities and Exchange Commission (SEC), headed by Gensler, is known for enforcing stricter regulations than the commodities watchdog, the Commodities Futures Trading Commission (CFTC). Numerous crypto executives, like Sam Bankman-Fried of FTX when he was still in charge, asserted that the majority of cryptocurrencies are commodities and vehemently advocated for the CFTC to regulate their sector.

On the other side, Gensler sees the majority of cryptocurrency goods as securities. He has accused several significant cryptocurrency companies, including Gemini, Genesis, and Kraken, of neglecting to register financial products with the SEC since January using this framework. These three businesses provided yield programs through which investors may receive interest on their initial deposits. Despite the fact that the corporations gave the goods various names, Gensler contends that they were all comparable processes that should fall under his SEC’s jurisdiction.

Gensler issued a warning to all programs with similar features. He added on CNBC that

Everyone in this market really ought to be put on notice by this. It doesn’t matter what you name it—lend, earn, yield, or APY… They ought to make an effort to comply.

Following the FTX meltdown, Genesis collapsed and is still liable for $900 million in debt to investors that funded Gemini Earn. The co-founder of Gemini, Tyler Winklevoss, stated that the SEC’s move was “counterproductive” in terms of assisting users in recovering their money and referred to the lawsuit as a “fabricated parking ticket.”

A year after one of these products significantly contributed to the collapse of the whole crypto market, Gensler is now targeting yield schemes. A cryptocurrency protocol called Anchor offered investors a startling 20% dividend last year in exchange for putting their money into the Terra-Luna ecosystem. Several detractors, including those from within the sector, claimed that Terra-business Luna’s model was unsustainable, and sure enough, it collapsed last May.

Earlier this month, Gensler filed a securities fraud complaint against Terraform Labs and its founder Do Kwon, alleging that they had cheated and misled investors. Gensler stated in an accompanying statement, “This case illustrates the extremes to which certain crypto businesses would attempt to evade complying with the securities laws.

Impact waves

Other government organizations have joined the SEC in their opposition to the cryptocurrency business. This week, a joint statement from the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) alerted banks to the liquidity risks associated with stablecoins. Early in February, the White House issued a statement cautioning about the dangers of cryptocurrency. The third-largest stablecoin in the world, Binance USD, is issued by Paxos. The New York Department of Financial Services said that it had directed Paxos to halt creating new tokens of the cryptocurrency.

All of this means that crypto businesses of all sorts, including miners, exchanges, and lenders, will probably become much more cautious about operating in the United States out of fear of facing regulatory action. Numerous Decentralized Finance (DeFi) businesses already limit access to their products for US users while offering products to investors elsewhere.

Smith, at the Blockchain Association, said that:

Overall, the appetite of investors trying to finance progress in the field is undoubtedly fading. Developers must be hesitant to launch a project here in the United States.

According to Smith, the SEC is approaching the matter with a “no-stone-left-unturned” strategy, which will have an effect on venture capitalists as well as crypto companies such as stake providers, exchanges, and centralized service providers. Smith said of Gensler, “If you look across the spectrum, he’s actually working to touch all of these sectors. “And the lending industry is the most affected because it currently doesn’t exist at all. Nearly all of the providers are closing down their operations or have faced enforcement action.

This week, a lot of cryptocurrency enthusiasts spread a story on Twitter that the SEC had, as part of its enforcement actions, closed down a $75 million crypto metaverse fund run by the company Everyrealm. Jesse Stein, the organization’s chief of asset management, disagreed with this assessment in a TIME interview. Stein claims that even though Everyrealm decided in February not to move forward with an investment offering that included virtual property in blockchain-based worlds like Sandbox and Decentraland, the choice had nothing to do with the SEC’s stance on cryptocurrencies.

Stein claims that the SEC did not get in touch with them or take any other action that would have made them close the offering or make them less interested in continuing.

Stein asserts that Gensler’s approach to cryptocurrencies is admirable and that he has no plans to scale back his blockchain-based investments. Considering that we have made every effort to comply, our organization doesn’t mind at all, he claims.

You will see institutional capital come in if the SEC continues to move in this way and the market becomes completely regulated—and if these initiatives are actually sustainable. I do believe that the industry will benefit overall at the end of the day.

In the meantime, Smith and the Blockchain Association are assessing their options in light of Gensler’s most recent wave of regulatory action. Ripple and Grayscale are two cryptocurrency startups that have been embroiled in legal disputes with the SEC for months or even years on related issues.

Smith adds:

We’re trying to determine whether there is any aggressive pushback we should be doing in the courts, along with our legal staff and outside attorneys. We believe that this is a battle worth having.



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