The influx of new investors into the cryptocurrency industry has been a positive development for its adoption, but it has also brought about some negative consequences. The industry is now facing increased scrutiny from regulators who are concerned about market manipulation, investor protection, and the potential for illicit activities facilitated by cryptocurrencies.
The United States Commodity Futures Trading Commission (CFTC) has issued a warning that it will be taking more enforcement actions against the cryptocurrency ecosystem in the next six months to two years. During the 27th Annual Milken Institute Global Conference on May 6, CFTC Chair Rostin Behnam expressed his belief that the rise in cryptocurrency prices and the influx of inexperienced retail investors will lead to another cycle of scams and frauds centered around cryptocurrencies.
Chair Behnam expects regulators to crack down on cryptocurrency firms as there is currently no legal framework in place to regulate them. Both the CFTC and the U.S. Securities and Exchange Commission (SEC) have intensified their crackdown on cryptocurrency firms since 2023, recording their highest number of enforcement actions against such firms last year.
According to research by Cornerstone Research, SEC enforcement actions reached a 10-year high in 2023, with digital assets becoming a top priority for the commission. The SEC tripled the number of administrative proceedings in 2022 and initiated 46 enforcement actions in 2023, resulting in $281 million in fines for settlements. Additionally, one-third of all CFTC crypto enforcement actions in 2023 were against cryptocurrency firms, representing over one-third of the total enforcement actions brought by the commission since 2015.
U.S. regulators currently have pending cases against U.S. cryptocurrency firms such as Kraken, Binance, and Coinbase. In April 2024, the U.S. Justice Department arrested the founders of the privacy-focused Samurai wallet on money laundering charges, and in May, the SEC issued a Wells notice against Robinhood.
Amidst the warnings from the CFTC Chair and the increased enforcement actions against cryptocurrency firms, these companies are preparing for regulatory actions in the coming years. Patrick Gruhn, a former partner at Swiss law firm Crypto Lawyers, believes that the SEC and other U.S. regulatory bodies are specifically targeting cryptocurrency firms with a broker-dealer business model. Law enforcement agencies are also focusing on privacy and mixer tools, as evidenced by the sanctions imposed on popular crypto-mixing services like Tornado Cash and the recent arrests of the founders of Samurai wallet.
While the crypto community has differing opinions on using mixing and privacy-focused services, a majority opposes the persecution of the founders and creators of such services who simply write neutral code and engage in legal activities.
The lack of a legislative framework and clear enforcement jurisdiction for different regulatory agencies has created complexities for both cryptocurrency firms and law enforcement agencies. Keith Blackman, a partner at the Bracewell law firm, highlights the contrast between the CFTC Chair’s concerns about the lack of comprehensive regulations for cryptocurrencies and the SEC Chair’s eagerness to proceed with enforcement actions without specific crypto regulations. This misalignment of perspectives may deter new crypto companies from entering the market and cause existing companies to invest more resources in legal and compliance counsel, potentially stifling innovation.
Neal Levin, a partner at Rimon Law, points out that poor policies and the absence of legislation create uncertainty about how businesses should operate. If regulators and enforcers do not have a legislative framework, they will try to fit crypto business models into existing regulatory frameworks. While other jurisdictions are actively developing comprehensive crypto regulations, the U.S. is still relying on a “regulations by enforcement” approach, which has already forced some established businesses to modify their offerings or shut down entirely. For example, Kraken has shut down its staking-as-a-service platform in the U.S. and the CFTC has charged the operators of Kraken with running an illegal digital asset derivatives exchange.
Despite the increasing number of regulatory actions against cryptocurrency firms, traditional financial institutions on Wall Street are showing more interest in digital assets. The launch of spot Bitcoin exchange-traded funds and investments from traditional financial institutions indicate the growing interest of the traditional financial sector in the crypto market. Furthermore, some market observers have noted that crypto holders are becoming a political force in the U.S., which makes the prospect of more favorable regulations seem less impossible.