At this stage, it probably isn’t too contentious to suggest that the U.S. Securities and Exchange Commission (SEC) is perhaps not the world’s biggest fan of crypto. There, we said it.
SEC sets sights on crypto
Like an over-eager puppy with something to prove, the tenacious regulator set its sights firmly on the crypto industry back in 2017, when then-SEC Chair Jay Clayton warned crypto exchanges that many of the tokens they listed may qualify as unregistered securities. For context, crypto was receiving a huge amount of mainstream press at the time, creating a positive feedback loop which caused bitcoin (and seemingly every new token created) to pump in value.
The following year, Clayton clarified that true ‘cryptocurrencies’ (those which serve to replace traditional fiat currencies), such as bitcoin, ether and litecoin, were classed as commodities. However, any token sold with an assumed ‘investment contract’ should be considered a security for regulatory purposes. The SEC launched a number of legal actions during this time, targeting token issuers, crypto hedge funds, brokers and other industry players.
Then, after 18 months of barking, the agency took one of its first major bites in June 2019, filing a complaint against Kik Interactive, which had sold one trillion of its digital kin tokens in a 2017 initial coin offering (ICO). The SEC argued that the kin token was an unregistered security by applying the Howey Test, based on a 1946 Supreme Court ruling over the sale and lease-back arrangement on some Florida citrus groves. Despite arguments that a 70-year-old ruling over citrus groves was not appropriate for assessing a new technology such as crypto, the SEC won the case, requiring Kik to pay a $5 million penalty.
The taste of blood
Emboldened by this success, the SEC started waving its Howey Test at every previous ICO it could think of, notably including Ripple’s XRP sale, although arguably this was not an ICO but a series of funding rounds from 2013 to 2019.
Fortunately (for the whole crypto industry) Ripple chose to fight back and has been locked in an ongoing legal battle with the regulator ever since. Meanwhile, the SEC continued to wield its power like a high school bully, picking fights with weaker kids, denying applications for Bitcoin exchange-traded funds (ETFs) seemingly out of spite, and generally acting like a douche-bag.
It had become so drunk on power that last month it decided to pick on some of the bigger kids in the schoolyard, namely major crypto exchanges Binance and Coinbase. Among a number of other charges, the SEC drew up lists of cryptocurrencies that it claimed were securities and accused the exchanges of trading them. Like Ripple, neither Binance nor Coinbase was prepared to just roll over and give in.
Just two weeks ago, after two and a half years of litigation, Ripple scored a partial victory against the SEC, when a judge ruled that sales of XRP on crypto exchanges did not constitute a security. If upheld, this victory could debunk most of the regulator's assertions regarding other tokens it claims are securities, seriously undermining many of the lawsuits which remain outstanding.
Dental visit overdue
With its remaining teeth at risk of being imminently extracted, and crypto firms no longer cowering in its wake, the SEC has seemingly changed tack. This week it published a warning targeting any accountants that might wish to service the lucrative crypto industry, the basic message being, “Don’t, or we’ll come after you too!”
There were various other assertions, one being that those ‘awful crypto people’ would misrepresent the accountants’ work as being equivalent to an official audit, thus sullying their good names and bringing the reputation of the entire profession into disrepute.
Looking at things from a crypto perspective, the whole display seemed tantamount to the last desperate snarl of a dog which knows it is not much longer for this earth. However, the accountancy sector is still rather in thrall to the SEC, since it killed off ‘Big 5’ member Arthur Andersen (thus creating the ‘Big 4’), due to disagreements over Enron.
With other U.S. authorities trying to dissuade commercial banks from offering services to crypto businesses, the SEC is putting the squeeze on accountants and auditors. This is clearly not intended to help regulate the industry (in which case audits and compliant banking services would surely be encouraged), but to force the industry out of existence.
However, as we have already speculated countless times, the end result is more likely to be the shunning of the U.S. by the crypto industry, leading to the country falling behind in this still-flowering technology.