Regulation
Impending Enforcement Wave: CFTC Targets Crypto Firms
The rapid growth of the cryptocurrency industry, fueled by an influx of new investors, has significantly increased adoption rates. However, this expansion is not without consequences.
As more and more inexperienced retail investors enter the market, regulators, particularly in the United States, have increased their oversight of the sector. Concerns mainly focus on market manipulation, investor protection and the potential use of cryptocurrencies in illicit activities.
Increased control: the CFTC aims
The United States Commodity Futures Trading Commission (CFTC) has signaled an upcoming intensification of enforcement measures targeting the crypto ecosystem. At the Milken Institute’s 27th Annual Global Conference on May 6, CFTC Chairman Rostin Behnam outlined the expected regulatory response to the recent surge in cryptocurrency prices and the corresponding increase in retail investor activity . Behnam anticipates a new wave of enforcement actions over the next six to 24 months, attributing this to rising asset values and interest from retail investors.
Currently, there is no established legal framework specifically governing crypto service providers, which Behnam believes will result in stricter actions from regulators against crypto companies. Over the past year, the CFTC and Securities and Exchange Commission (SEC) have increased their enforcement actions, with 2023 seeing a record number of such actions.
According to Cornerstone Research, a litigation consultancy, SEC enforcement actions hit a 10-year high in 2023, with digital assets becoming a top priority. THE SECOND not only tripled its administrative proceedings in 2022, but also initiated 46 enforcement actions in 2023, resulting in fines of $281 million in settlements. Meanwhile, the CFTC has undertaken 47 enforcement actions in 2023, representing more than a third of its total actions since 2015.
Source: Cornerstone
Taking Down the Big Names: Crypto Firms Under Fire
Prominent US crypto companies such as Kraken, Binance and Coinbase have faced numerous cases from regulators. Enforcement efforts continued through 2024; for example, in April the US Department of Justice arrested the founders of the privacy-focused Samurai Wallet on money laundering charges. The following month, the SEC issued a Wells Notice to Robinhood.
Amid these developments, the SEC and other regulators appear to be targeting companies that operate under a broker-dealer business model, which are seen as direct competitors to traditional financial institutions. Patrick Gruhn, a former partner at Swiss law firm Crypto Lawyers, told Cointelegraph that any crypto company allowing speculation on crypto asset prices or offering payments equated to interest risks regulatory action, whether or not it considers itself decentralized.
Another focal point for US agencies concerns privacy and mixing tools, which anonymize cryptocurrency transactions. Actions have been taken against services like Tornado Cash and, most recently, the founders of Samurai were arrested.
A tangled web: the regulatory labyrinth
The regulatory landscape is complicated by the lack of a clear legislative framework and the overlapping enforcement jurisdiction of various agencies. Keith Blackman, a partner at the Bracewell law firm in New York, noted that while CFTC Chairman Behnam has often expressed concerns about the lack of comprehensive crypto regulation in the United States, Chairman the SEC, Gensler, was eager to take enforcement action, even without cryptocurrency-specific regulations.
According to Blackman, this approach leads to alignment between the CFTC and the SEC, which could deter new crypto companies from entering the market and push existing companies to allocate more resources to legal and compliance efforts, which could stifle innovation. Neal Levin, partner at Rimon Law, echoed these sentiments, saying the lack of clear policies creates uncertainty about appropriate behaviors within the industry.
Regulators are obligated to apply existing laws to crypto business models, using their enforcement as a means to shape behaviors and provide guidance in lieu of new legislation.
Beyond the United States: A Global Look at Crypto Regulation
As the United States continues its “regulation by application” strategy, other jurisdictions are developing more comprehensive crypto regulations. In the United States, this approach has already forced several established companies to change their offerings or cease operations altogether. Despite regulatory pressures, the traditional financial sector is increasingly adopting digital assets.
The launch of Bitcoin spot exchange-traded funds and investments by traditional financial institutions highlight the growing general public interest in cryptocurrencies. Additionally, as cryptocurrency holders become more politically active, there is a growing possibility of more crypto-friendly regulations emerging in the future.