The entry of new investors into the cryptocurrency industry has been a positive development for adoption, but it has also come with some drawbacks. Regulatory bodies are keeping a close eye on the industry due to concerns about market manipulation, investor protection, and the potential for cryptocurrencies to facilitate illicit activities.
The United States Commodity Futures Trading Commission (CFTC) has issued a warning that it will be taking more enforcement actions against the crypto ecosystem in the next six months to two years. During the 27th Annual Milken Institute Global Conference on May 6, CFTC Chair Rostin Behnam expressed his belief that the rise in cryptocurrency prices and the influx of inexperienced retail investors will lead to another cycle of scams and frauds.
Behnam stated, “We’re likely to see another cycle of enforcement actions in the next 6 to 18 months, or 6 to 24 months, due to this cycle of asset appreciation and interest from retail investors.” With no current legal framework in place to regulate crypto service providers, the CFTC chair expects regulatory agencies to crack down on crypto firms.
The US Securities and Exchange Commission (SEC) and the CFTC have already taken strong action against crypto firms since 2023, with both agencies recording their highest number of enforcement actions against such firms last year. According to research conducted by litigation consulting firm Cornerstone Research, SEC enforcement actions reached a 10-year peak in 2023, with digital assets becoming a top priority for the commission.
In 2023, the SEC tripled the number of administrative proceedings and initiated 46 enforcement actions. The regulator imposed $281 million in fines for settlements. Additionally, one-third of all CFTC crypto enforcement actions in 2023 were directed at crypto firms. The CFTC has taken 47 enforcement actions, representing over one-third of the total enforcement actions brought by the commission since 2015.
US regulators currently have multiple cases pending against American crypto firms such as Kraken, Binance, and Coinbase. In April 2024, the US Justice Department arrested the founders of a privacy-focused Samurai wallet on money laundering charges. In May, the SEC issued a Wells notice against Robinhood.
Broker-dealers and mixer services are being targeted by US regulators. With the CFTC chair’s ominous warnings and increased enforcement actions against crypto firms, these companies are preparing for regulatory actions in the coming years. Patrick Gruhn, a former partner at Crypto Lawyers, a Swiss law firm, believes that the SEC and other US regulatory bodies are specifically targeting crypto firms with a broker-dealer business model. Privacy and mixer tools have also become a focus for law enforcement agencies, with popular crypto-mixing services such as Tornado Cash receiving sanctions and the founders of another privacy-focused wallet service provider, Samurai, being arrested.
Despite the volatility of Bitcoin prices, there are indications that BTC will be successful in the long term. While there are mixed reactions within the crypto community regarding the use of mixing and privacy-focused services, the majority opposes the persecution of the founders and creators of such services for writing neutral code and not engaging in any illegal activities.
The lack of a legislative framework and enforcement jurisdiction for different agencies has created complexities for both crypto firms and law enforcement agencies. Keith Blackman, a partner at the Bracewell law firm, mentioned that the CFTC chair has expressed concerns about the lack of comprehensive regulations governing cryptocurrencies in the US, which contrasts with SEC Chair Gensler’s eagerness to proceed with enforcement actions without the need for crypto-specific regulations. This suggests that the CFTC is gradually aligning its perspective with the SEC.
Blackman also believes that new crypto companies will be deterred from entering the market due to the added threat of CFTC enforcement without clear-cut regulations. Existing companies will need to invest more in legal and compliance counsel, increasing costs and potentially stifling innovation. Neal Levin, a partner at Rimon Law, stated that poor policies and a lack of legislation lead to uncertainty about how to operate. If regulators and enforcers do not have a legislative framework, they will attempt to fit business models into existing regulations.
While other jurisdictions are actively developing comprehensive crypto regulations, the US is still adopting a “regulation by enforcement” approach, which has already forced several established businesses to modify their offerings or shut down completely. Kraken has already closed its staking-as-a-service platform in the US, and the CFTC has charged the operators of Kraken with running an illegal digital asset derivatives exchange.
Despite the increasing number of regulatory actions against crypto firms, Wall Street is becoming more receptive to digital assets. The launch of spot Bitcoin exchange-traded funds and investment from traditional financial institutions indicate the growing interest of the traditional financial sector in the crypto market. Some market observers have also noted that crypto holders are gaining political influence in the US, making the possibility of more favorable regulations not so far-fetched.