Crypto’s Existential Crisis Continues as SEC Issues Investor Warning

cryptocurrency regulation

Crypto’s path to regulatory acceptance is getting longer by the day.

Certain alarmist observers even believe the industry might soon be done for in the U.S. entirely.

This, as the U.S. Securities and Exchange Commission (SEC) issued an alert Thursday (March 23) emphasizing to investors that cryptocurrency offerings across the U.S. market may be illegal because they are not registered with the regulator.

Frictions between crypto businesses and U.S. regulators have reached a crescendo in recent days, with both sides growing increasingly loud in their criticisms of the other.

“The only money you should put at risk with any speculative investment is money you can afford to lose entirely,” the Gary Gensler-chaired agency said. “No crypto asset entity is registered with the SEC as a national securities exchange … And no existing national securities exchange currently trades crypto asset securities.”

The U.S. has not yet established a comprehensive framework or set of regulations for the crypto industry specifically, relying instead on existing securities and commodity laws, frustrating those crypto companies that have so far run afoul of them.

Read more: White House Economic Report Shifts Stance on Crypto From Neutral to Negative

If All You Have Is a Hammer, the Whole World Looks Like a Nail

The SEC has to date gone after Terra, Coinbase, Kraken, Paxos and Binance, saying the crypto companies either offered customers products that were in effect illegal securities offerings, or violated investor protection laws.

Brian Armstrong, CEO of crypto exchange Coinbase, said in a tweet that “the SEC simply has not been fair, reasonable, or even demonstrated a seriousness of purpose when it comes to its engagement on digital assets.”

Somewhat ironically, Coinbase, a publicly listed U.S. company, made its market debut on the very same day U.S. senators confirmed Gary Gensler as chairman of the SEC: April 14, 2021.

Since Gensler’s confirmation nearly two years ago, the agency has stepped up enforcement actions against the crypto sector, intensifying its approach even further since the collapse of the once-popular exchange FTX in November 2022.

SEC allegations must ultimately be tested in court, but Gensler addressed much of the industry’s ongoing criticism of his agency’s enforcement actions in an op-ed penned earlier this month (March 9).

“I find the talking point that there’s a lack of clarity in the securities laws unpersuasive,” Gensler wrote in the piece, titled “Getting crypto firms to do their work within the bounds of the law.” He continued, “Some crypto companies might message that the laws are unclear rather than admitting that their platforms don’t have sufficient investor protection.

“At times, it has felt like some have sought a stamp of approval for noncompliant activity, rather than changing a fundamentally non-compliant business model rife with conflicts,” the SEC chair added.

Read also: Can Crypto’s Value Proposition Ever Translate Into Real Value?

What’s at Stake With Crypto Staking

“Entities and platforms involved in lending or staking crypto assets may be subject to the federal securities laws,” the SEC wrote in its recent investor alert, and a common thread among the recent SEC actions taken against both Coinbase and Kraken is the targeting of their centralized crypto staking services.

As reported by PYMNTs, ever since the Ethereum network switched last year from a “proof-of-work” architecture to a “proof-of-stake” (PoS) blockchain network where investors can “stake” their coins in exchange for rewards, speculation has been simmering around what that shift might mean for its regulatory status.

Industry observers have noted that the new “staking” protocol is not too far away in practice from the interest that is paid out on bonds — but a careful reading of the SEC action taken against Kraken shows that the agency may not be against the concept of staking as much as it is the way staking services are currently being offered to retail investors.

Under the Ethereum network’s PoS mechanism, the blockchain is secured by validators instead of miners. Running a validator on the Ethereum network requires more technical know-how than many retail crypto investors may possess, which is why companies like Kraken and Coinbase offered staking as service products.

The SEC’s actions against staking are aimed directly at these products, and not at the ability of individuals to serve as validators themselves.

Industry observers and crypto advocates believe that by removing centralized staking from the marketplace, the SEC may ultimately push PoS blockchains to be more decentralized and distributed, as crypto was originally and inherently meant to be.

That said, Ethereum requires stakers to deposit around $50,000 worth of the token into its PoS smart contract to be a validator, making it out of reach for many individual retail investors, and muddying the future viability of the protocol.