More Strict Rules of SEC Under Crypto Custody Crackdown

The SEC has escalated its campaign to reign in.
The regulator once again pushed its efforts to make more strict rules for crypto companies.

It seems the Securities and Exchange Commision (SEC) is getting stuck in to clean up the wild west of crypto. It’s gone after the big crypto players like Gemini and Kraken. It’s also using rules on unregistered securities as its key hammer.

SEC’s recent action

In recent weeks, the SEC has been swift in its efforts to reprimand crypto offerings it regards as breaking the rules. It is leaning on the argument that they are unregistered securities.

The highest-profile suit came against one of the crypto players Genesis and the Winklevoss twins’ Gemini in January, after the SEC accused its disastrous “Gemini Earn” program of being an offering of unregistered securities.

Last week Kraken, a crypto exchange, paid a $30 million settlement to the SEC. Kraken also agreed to stop its “staking” program, where investors lock in their holdings of digital assets for an interest-based reward.

Then recently, crypto firm Paxos was forced by the New York Department of Financial Services (NYDFS) to stop minting its stablecoin after a planned lawsuit from the SEC over the sale of unregistered securities. It differs from the previous staking suits.

The most-hyped collapse of FTX in November last year has no-doubt increased the urgency to rein in potentially risky offerings. This mishap in the crypto industry also locked out billions of dollars in customer deposits. But SEC’s discomfort with crypto stretches back years – as far as the asset has been popular. In October 2021, SEC Chair Gary Gensler noted the crypto industry as “a bit of the Wild West.”

The staking programs have become a means for crypto companies to inflate the value of their assets using the funds of consumers. An investigation into now-bankrupt crypto company Celsius found that it had used customer funds to prop up the value of its native coin in a bid to return high yields to investors.

The SEC noted the Howey Test to determine if an asset can be classed as a security. This Howey test has four prongs, which all need to be passed to determine as a security: an investment of money, in a common enterprise, with expectations of a profit, and to be derived from the efforts of others.

So in the United States, if an asset is deemed to be a security it requires to be registered with the SEC. Meanwhile the SEC states, an unregistered security is simply one that has not been rubber-stamped by the regulator. And unregistered securities have been the subject of various frauds, with the SEC saying their hallmarks include the promise of high yields with no risk, aggressive sales tactics, and are backed by unqualified investment professionals. Thus, their use is limited.

The SEC and crypto companies need to wait on the outcome of multiple lawsuits to set a precedent. The outcome could mean crypto companies having to register offerings and assets as securities.

Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing