The Future of Crypto Enforcement in the U.S.

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firstly, on the nefarious act of fraud, and secondly, on the essential events of capital raising. The regulation of such capital raising is the primary aim of the Securities Act of 1933. When an investor bestows their hard-earned coin upon an entrepreneur, who promises to employ it in a venture for profit, the investor is entitled to certain disclosures regarding the enterprise. Early investigations into crypto were primarily concerned with this fundraising endeavor, often masquerading as unregistered initial coin offerings, or ICOs, if you will. The notion was that many ICOs were not dissimilar in essence to equity or debt offerings, and thus should be regulated in a similar fashion.

To their credit, the industry responded with a modicum of responsibility, and now, crypto entrepreneurs frequently raise funds in accordance with federal securities laws. In one of several avenues, some offerings are exempt from SEC registration, provided they are limited to accredited investors. These entrepreneurs then utilize the capital to construct a blockchain protocol or other crypto contrivance. Once established, the sale of tokens is likely not deemed a securities offering, as purchasers are not acquiring tokens as an investment in a business. Even if there exists a glimmer of hope for profit, such profit would arise from the endeavors of the buyers and other participants, rather than the exertions of a central business manager.

The last four years

In the course of the last four years, the SEC has directed its enforcement efforts more towards secondary markets, such as centralized trading platforms and decentralized protocols. The application of federal securities laws to these markets remains somewhat nebulous. These transactions typically do not involve a singular entrepreneur collecting funds from investors for business purposes. Instead, there exists a multitude of crypto participants, sometimes engaging anonymously through autonomous software. Token buyers may find themselves in the unfortunate position of not knowing who sold them their tokens, and there may be no central figure pivotal to future success. Federal district courts have arrived at varying conclusions, and whispers abound that the SEC may abandon one of these pivotal cases.

More broadly, enforcement has become the predominant focus of SEC regulation. The SEC has doubled the size of its crypto unit, creating new supervisory and trial attorney positions, as if they were preparing for a grand ball. They have expended years and a prodigious amount of resources litigating several non-fraud cases. Many additional lawyers, not part of the unit, have engaged in crypto investigations, and crypto has seemingly become the belle of the enforcement ball.

This approach, however, has not yielded useful guidance for the industry. Many SEC rules possess technical aspects that are incompatible with the anonymous decentralized ledger that is blockchain technology. Under the enforcement approach of recent years, the very premise of the technology was regarded not as a feature, but rather as a bug. The outcome has been an existential enforcement risk to a burgeoning industry, with economic activity being driven offshore, as if fleeing from a scandal.

The future

I do not believe the crypto industry yearns for a lawless Wild West devoid of regulation. They desire a sensible rulebook that renders compliance feasible, whilst also wishing for regulators to take a firm stance against fraud. No legitimate actor benefits from the presence of fraud in the industry, after all.

What implications does this hold for the next four years of enforcement?

Firstly, enforcement is but one facet of regulation. We are likely to witness an increase in resources allocated to the other components of effective regulation — new guidance and rules that provide an achievable regulatory framework. Acting SEC Chairman Mark Uyeda has recently proclaimed the formation of a new crypto task force to develop a “sensible regulatory path,” and Commissioner Hester Peir

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2025-02-26 18:59