The U.S. War on Crypto Isn’t Over

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In the grand theatre of American finance, where the curtains have barely drawn back on the latest act, a U.S. crypto czar has been appointed, and comprehensive crypto legislation has been announced. Many a bright-eyed optimist now believes that the era of “regulation by enforcement” has been consigned to the dustbin of history. However, while the SEC and CFTC have donned their friendliest smiles, state regulators and Attorneys General are sharpening their quills, ready to take up the mantle of crypto enforcement with all the enthusiasm of a dog chasing a postman.

For years, the SEC’s rather zealous approach to “regulation by enforcement” has stifled the growth of the crypto industry, much like a well-meaning aunt stifling a child’s creativity with a stern look. This led many in the industry to rally together, like a band of merry men, to support pro-crypto candidates, hoping to end the so-called “war on crypto” once and for all.

And lo and behold, their strategy bore fruit! Donald Trump, that most unlikely of crypto champions, was elected as the first president to openly support the crypto industry, despite having previously treated it with the same disdain one might reserve for a soggy biscuit. Since taking office, he has appointed David Sacks as the nation’s first “Crypto Czar,” established a President’s Working Group on Digital Asset Markets, and appointed interim SEC and CFTC Chairs who have been positively gushing about their support for the crypto industry.

But don’t pop the champagne just yet! Those federal changes are unlikely to put an end to the aggressive enforcement actions from state regulators, who are under public pressure to rein in crypto like a wayward puppy. Many in the industry have already faced the wrath of regulators like the New York Department of Financial Services (NYDFS), which recently managed to extract a $37 million settlement from a crypto lending platform. It seems that even when the SEC was busy flexing its muscles, NYDFS was not one to be left out of the fun, and you can bet your bottom dollar that they’ll be ready to fill any void left by a scaling back of SEC efforts.

Other states are following New York’s lead with all the enthusiasm of a new dance craze. In late 2023, California enacted the Digital Financial Assets Law, empowering its Department of Financial Protection and Innovation to license and regulate digital assets. Meanwhile, the Illinois legislature has begun to consider a new bill, the Digital Assets and Consumer Protection Act, which would allow the state to regulate any company engaged in “digital asset business activity” with an Illinois resident. One can only imagine the paperwork involved!

State Attorneys General

Now, it’s possible that new federal legislation could limit the ability of state regulators to bring their own enforcement matters, much like a strict headmaster limiting the number of sweets allowed at a school fête. On February 4, House and Senate Committee Chairs expressed confidence in the passage of comprehensive legislation that would create a regulatory framework for crypto within the next 100 days. Since federal law preempts state law, this new legislation could rein in some of the more exuberant state regulatory activities.

However, even if state regulators find themselves somewhat hamstrung by new legislation, that won’t stop state Attorneys General from filing lawsuits alleging fraud by crypto-related businesses. These AGs were quite active during the SEC’s “regulation by enforcement” crusade, and in 2023, New York Attorney General Letitia James filed a lawsuit against a crypto trading platform that had the audacity to falsely represent itself as an exchange. The platform later settled for a cool $22 million and agreed to steer clear of New Yorkers in the future. A wise move, one might say!

To be sure, a national regulatory framework and having pro-crypto regulators in Washington will provide more certainty and predictability for the crypto industry. But anyone who believes that “regulation by enforcement” is at an end is as naïve as a child believing in the tooth fairy. Expect aggressive lawsuits and regulatory activity to continue in the years to come. The venue may shift from the SEC to the states, but the impact on crypto businesses and their customers will remain as palpable as a well-placed whoopee cushion at a formal dinner.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners

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2025-02-26 20:37