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Date: 2025-02-26 15:54:01
Being the former chief of the SEC's crypto division from 2017 to 2019, I'm frequently questioned about the type of crypto enforcement we can anticipate from the new administration. My first response is that I'm unsure. My second response is that I think it will differ, but it won't vanish.
To predict the future of crypto enforcement, we should examine the past.
The crypto enforcement division of the SEC was established in 2017 during the initial Trump Administration. The initial emphasis was on two areas: one, fraud, and two, crucial capital raising events. The primary objective of the Securities Act of 1933 is the regulation of capital raising. When an investor provides funds to an entrepreneur who will utilize it in a business to generate profits, the investor is entitled to specific information about the business. Early crypto investigations focused on this fundraising activity, which was typically in the form of an unregistered initial coin offering (“ICO”). The concept was that many ICOs at that time were not significantly different in substance than equity or debt offerings and should be regulated accordingly.
The industry reacted responsibly, and now, crypto entrepreneurs frequently raise funds in compliance with federal securities laws. In one of several options, some offerings are exempt from SEC registration because they are limited to accredited investors. The entrepreneurs then utilize the capital to build a blockchain protocol or other crypto product. Once constructed, sales of tokens are likely not securities offerings because people are not purchasing tokens as an investment in someone's business. Even if there is hope for profit, that profit would result from the activities of the buyers and other participants, not the efforts of a central business manager.
During the past four years, the SEC has concentrated more of its enforcement efforts on secondary markets, such as centralized trading platforms and decentralized protocols. It's less clear how federal securities laws apply to these markets. These transactions generally do not involve a central entrepreneur collecting funds from investors and using it in a business. Instead, there are thousands or even millions of crypto participants interacting with each other, sometimes anonymously via autonomous software. Token buyers might not know who sold them tokens, and there may be no central actor that's crucial to future success. Federal district courts have reached varying conclusions, and there are reports that the SEC might drop one of these key cases.
More broadly, enforcement became the primary focus of SEC regulation. The SEC doubled the size of the crypto division, creating new supervisory and trial attorney positions. It spent years and a significant amount of resources litigating several non-fraud cases. Many additional non-unit lawyers worked on crypto investigations, and crypto appeared to be the main focus of SEC enforcement.
This approach did not provide useful guidance to the industry. Many SEC rules have technical aspects that are incompatible with the anonymous decentralized ledger that is blockchain technology. Under the enforcement approach of recent years, the very foundation of the technology was treated not as a feature, but as a flaw. The result was existential enforcement risk to a thriving industry and economic activity being pushed offshore.
I do not think the crypto industry desires a lawless environment with no regulation. They want a reasonable rulebook that makes compliance feasible, and they also want regulators to crack down on fraud. No legitimate actor benefits from fraud in the industry.
What does this imply for the next four years of enforcement?
Firstly, enforcement is just one component of regulation. We will likely witness increased resources dedicated to the other aspects of effective regulation — new guidance and rules that offer a feasible regulatory framework. Acting SEC Chairman Mark Uyeda recently announced a new crypto task force for developing a “sensible regulatory path,” and Commissioner Hester Peirce, who will lead the task force, included in her objectives “preserv[ing] industry’s ability to offer products and services.” The dedicated crypto division has also been reduced in size and repurposed to cyber and emerging technologies, with many staff returning to general enforcement duties.
Secondly, we could see a renewed emphasis on combating fraud. The Commission did not cease bringing crypto fraud cases during the last four years, but many headline cases were non-fraud regulatory disputes. That might change; as Commissioner Peirce said in her objectives speech, “We do not tolerate liars, cheaters, and scammers.”
Thirdly, once there is a new rulebook, we can expect the SEC to enforce those rules. That will take time. We might observe a transition period, with some non-fraud cases but more focus on writing the new rulebook. Once adopted, enforcement of that rulebook could come after a fair notice period for the industry to adapt to it.
I anticipate SEC crypto enforcement to persist, but with different priorities. Investor protection will be balanced with the SEC's co-equal mandates of facilitating capital formation and maintaining orderly markets. The crypto industry is filled with responsible actors who want to comply; they just need a rulebook that makes compliance achievable. A renewed approach will allow the industry to flourish without compromising investor protection.
The SEC has been the most assertive crypto regulator thus far, but it is not the only one. Other federal agencies may emerge as co-equal regulatory leaders, either through legislation or otherwise, especially if the SEC no longer maintains the position that every cryptocurrency (except Bitcoin) is a security. Some state authorities have been active in crypto, and that will likely continue or even increase.
A client recently reminded me that there will be another election in four years. The new regulatory approach, and the industry’s business and product decisions, must be durable. If they are not, the renewed approach to crypto over the next four years could be undone as easily as that of the last four years.