A legal expert has warned that the U.S. Securities and Exchange Commission will likely take more stringent actions against the crypto industry.
Hynes Law Group partner Jesse Hynes noted that the SEC had focused on crypto exchanges under its jurisdiction. Nevertheless, the lawyer said the tighter control over crypto would ultimately benefit consumers.
1/ People think the crackdown is here. It’s not yet. It’s coming though. And here’s the hottest take of them all: it will ultimately be what’s best for investors. The road there will be terrible and unnecessary.https://t.co/zSL692UBvR
— Jesse Hynes 🌱 (@jesse_hynes) April 12, 2023
According to Hynes, certain crypto companies adopt “deceptive” marketing practices that create a sense of community involvement and financial opportunities, which may not reflect the companies’ true operations.
Analysts said tighter regulations would give investors legal rights, entitlements and better protections over their crypto assets. Hynes predicted that the SEC would target numerous crypto and non-fungible token (NFT) projects that raise funds by promoting their products as securities.
Hynes argued that not all crypto and NFTs could be considered securities, unlike what the SEC claimed.
As noted by analysts, the U.S. regulatory system is ineffective in targeting the “worst actors” in the industry. Hynes said authorities would likely target the more well-known industry players first because they were more “visible.” He added that the ineffective regulations would make the processes involved in protecting investors “suck” and “slow.”
SEC to hire more prosecutors
Sources said the SEC would hire more prosecutors to strengthen its enforcement ability, further signaling a potential escalation of the agency’s efforts in regulating the crypto industry.
Last year, a report suggested that the SEC was losing staff at the fastest rate in ten years. Anonymous SEC employees said they received minimum feedback on laws they had written. The report added that SEC staff were wary of heightened litigation risks due to shortened industry comment periods.
The SEC has sued numerous crypto firms over the past few years. One of its ongoing legal cases is against tech company Ripple, which according to the SEC, sells XRP — a token created in 2012 — to investors without registering the crypto as a security.
Analysts said the ruling of the Ripple lawsuit would have a profound impact on how financial authorities use traditional tools to detect violations of laws. For instance, many have pointed out that the SEC’s Howey test is ineffective in determining whether a digital currency transaction can be considered a security. The ruling will likely prompt the agency to upgrade its analytical tools.
Crypto proponents have criticized the SEC’s actions against the industry. In late 2022, SEC chairman Gary Gensler received an inquiry from Senate Republicans to explain the agency’s dwindling workforce. The Congress members also said Gensler had “overstepped” his authority by taking a hostile approach against the industry.
Recently, the SEC’s Investor Advisory Committee (IAC) — which consists of traditional finance actors, academia and consumer advocates — announced its support for the agency’s campaign to enforce existing securities laws on crypto companies. However, the committee added that the SEC should provide formal guidance specifically for the digital asset industry.
“The SEC can then use this input to craft additional guidance or propose rules to address issues identified,” the IAC said.
Despite criticisms from crypto supporters, Gensler has said on multiple occasions that crypto firms do not need differential treatment from other financial businesses. He insisted that the existing federal securities regulations were “ample” to manage the industry.
Gensler already said in the past that his agency had no “outward interest” in publishing formal industry guidance for crypto companies to help them meet regulatory expectations.
The IAC encouraged the SEC to prioritize crypto enforcement. The committee also suggested that the SEC oppose congressional efforts to draft legislation that would place crypto out of federal securities laws and weaken investor protections.