Crypto Crackdown: SEC And Treasury Reportedly Investigating Exchanges

Volatility aside, crypto has perhaps been best known for lawlessness over the past decade. Mysterious cryptocurrency founders have disappeared after making millions from the initial coin offerings, while hackers and scammers have sought refuge in a financial Wild West powered by the blockchain.

The US government is working to change that, as evidenced by two investigations revealed on Tuesday. Coinbase, the largest crypto exchange in the US by trading volume, is facing an investigation by the Securities and Exchange Commission, according to Bloomberg. The SEC reportedly claims that the 150 tokens that Coinbase allows users to purchase must be listed as securities, which would put the exchange under the purview of regulators.

If cryptocurrencies are categorized as securities, companies wishing to create or trade crypto would have to register with the SEC. It would also mean that some crypto scams would be crimes. Shares of Coinbase fell 21% after Bloomberg’s report.

Then there’s Kraken, a $10 billion crypto exchange that the New York Times reports is under investigation by the Treasury Department’s Office of Foreign Assets Control for alleged sanctions violations. Kraken is accused of allowing customers in Iran to buy and sell crypto, a violation of US sanctions, the Times reported. It follows a warning from the US Treasury Department last October that digital assets like bitcoin and ether could make it easier for countries like Iran, North Korea and now Russia to evade sanctions.

“Kraken has implemented robust compliance measures and continues to expand its compliance team to match business growth,” said Marco Santori, the company’s chief legal officer in a statement. “Kraken closely monitors compliance with sanctions laws and generally even reports potential problems to regulators.”

Coinbase’s chief legal officer, Paul Grewal, tweeted, “I’m happy to say it again and again: We believe our rigorous due diligence process – one the SEC has already reviewed – keeps securities off our platform, and we I look forward to discussing this with the SEC.”

I’m happy to say it again and again: We believe that our rigorous due diligence process – one that the SEC has already reviewed – keeps securities off our platform, and we look forward to discussing this with the SEC. A refresher course:

— paulgrewal.eth (@iampaulgrewal) July 26, 2022

The cases in Kraken and Coinbase are different, but both highlight the greater degree to which regulators and law enforcement are targeting crypto companies. The anonymity provided by the blockchain makes it difficult, but not impossible, to target specific users. Companies and their employees make goals easier. The SEC launched a similar investigation into Binance in June to determine whether the exchange’s BNB cryptocurrency should be listed as a security.

Studies are also starting to see results. Last week, federal prosecutors accused Ishan Wahi, a former Coinbase product manager, of insider trading because Wahi had leaked information to his brother and a friend about upcoming altcoin listings. It is being called the first insider trading charge regarding digital tokens. In June, a product manager at NFT marketplace OpenSea was indicted by the FBI for using confidential information to buy NFTs shortly before they were promoted on the site, which was also called a first.

Perhaps most importantly, lawmakers are slowly but surely working on bills that would bring cryptocurrencies under more explicit legal frameworks. A bipartisan bill before the Senate proposes that cryptocurrency should be regulated as a commodity and as such be under the auspices of the Commodity Futures Trading Commission (CFTC). Meanwhile, the House’s Financial Services Committee is working to draft a bill that would allow issuers of stablecoins, which are tethered to fiat currencies such as the US dollar, to be placed under the supervision of the Federal Reserve.

The 2022 cryptocurrency collapse has seemingly sparked regulatory impulses. Much of the crash in bitcoin and ether can be attributed to poor macroeconomic conditions. The same rate hikes that caused bitcoin to crash did some to tech stocks, too, but the crypto industry has seen a painful contagion effect that has exacerbated the chaos. When Terra’s stablecoin de-pegged, it wiped billions in value from the market. That caused the bankruptcy of hedge fund Three Arrows Capital. When 3AC could no longer pay its debts, Voyager Digital, a company to which it owed more than $600 million, declared bankruptcy.

Crypto boosters continue to confident tokens like bitcoin and ether will live on to see new, staggering all-time-high valuations. By the time that happens, if the U.S. government gets its way, the Wild West might not be so wild.