SEC Expands Crypto Unit In Major Enforcement Shake-Up

In a sign of its increased focus on digital assets supervision, the US Securities and Exchange Commission (SEC) has announced that it will nearly double the size of its crypto enforcement team to 50 dedicated personnel.

With 20 new positions on offer, the SEC said it will take on more supervisors, trial counsels, fraud analysts and investigative staff attorneys, both at its Washington, D.C. headquarters and at its regional offices.

The move will also see the SEC Division of Enforcement’s Cyber Unit renamed as the Crypto Assets and Cyber Unit.

In a press statement, SEC chair Gary Gensler said the move is in line with the agency’s renewed focus on safeguarding and protecting crypto investors as the asset class continues to mature.

"The US has the greatest capital markets because investors have faith in them and as more investors access the crypto markets, it is increasingly important to dedicate more resources to protecting them," he said.

“By nearly doubling the size of this key unit, the SEC will be better equipped to police wrongdoing in the crypto markets, while continuing to identify disclosure and control issues with respect to cybersecurity."

Since its launch in 2017, the unit has brought more than 80 enforcement actions related to fraudulent and unregistered crypto-asset offerings and platforms, resulting in monetary relief of more than $2bn.

In 2021 alone, according to financial consultancy Cornerstone Research, the SEC brought 20 crypto-related enforcement actions.

The largest crypto-related settlement to date was issued in September 2021, when the agency settled an administrative proceeding against three media companies that conducted an illegal unregistered offering of stock and digital assets. The three companies agreed to pay more than $539m in damages for distribution to investors.

"Crypto markets have exploded in recent years, with retail investors bearing the brunt of abuses in this space,” said Gurbir Grewal, director of the SEC’s Division of Enforcement.

“Meanwhile, cyber-related threats continue to pose existential risks to our financial markets and participants.

"The bolstered Crypto Assets and Cyber Unit will be at the forefront of protecting investors and ensuring fair and orderly markets in the face of these critical challenges."

Going forward, the SEC said its expanded unit will focus on investigating securities law violations in six key areas:

1. Crypto-asset offerings.
2. Crypto-asset exchanges.
3. Crypto-asset lending and staking products.
4. Decentralised finance (defi) platforms.
5. Non-fungible tokens (NFTs).
6. Stablecoins.

Global trend towards increased crypto enforcement

The SEC’s announcement follows a similar upsizing of crypto enforcement capacity at its UK counterpart, the Financial Conduct Authority (FCA).

In March this year, the FCA began advertising for a head of its new digital assets enforcement department, and last month Victoria McLoughlin was chosen for the job, according to her LinkedIn profile.

McLoughlin was previously a supervision manager for crypto-assets and digital markets at the FCA, where she has spent almost 12 years in total.

Also in March, the FCA continued to publicise its crackdown on crypto firms, revealing that it had opened more than 300 cases with possible ties to unregistered crypto-asset businesses over a six-month period.

In April, the FCA announced that it will create 80 new roles to shut down so-called “problem firms”, but it is unclear how many of those roles will focus on crypto specifically.

Jim Preissler, managing partner at Tritaurian Capital and co-founder of SOMA.finance, told VIXIO that both the SEC and the FCA’s renewed focus on crypto comes at the right time, given the exponential growth of the asset class over the last two years.

"The SEC has been publicly telegraphing this move for quite some time,” he said. “Government agencies are not exactly known for 'quick action' in cases like this, but once the juggernaut is in motion it can become effective.

"The exponential growth may have taken regulators off guard, but now there seems to be a clear path forward, and there does seem to be a more coordinated effort among Tier 1 global markets to create more uniformity akin to other regulated markets, such as equities."

At the depths of the global markets collapse of March 2020, during the initial spread of COVID-19, crypto’s total market cap shrank to $140bn.

Over the next 18 months, however, it would go on to swell by almost 2,000 percent, hitting an all-time high of $2.9trn in November last year.

But what many observers called a bubble in the crypto-assets appears to have popped even faster than it inflated, with crypto’s total market cap having shed more than 40 percent of its value since then, falling to $1.7trn today (May 5).

Christopher Caruana, vice president of AML solutions at Feedzai, a financial risk management platform, said the enormous boom and bust of the last two years means that regulators can no longer look at crypto as an insignificant asset class.

"The SEC’s announcement is yet another signal from the regulatory community that cryptocurrency usage among the general population — and specifically the investor community, in this case — has risen to an adoption level whereby oversight obligations are growing,” he said.

“We continue to see the regulators staff-up capabilities, while the guidance to the industry about who will be overseeing their activities evolve.

“Much of this stems from the fact that cryptocurrency is still very much undefined — is it a security, a currency or a commodity?”

Caruana said he expects existing regulations to be layered into the financial crime programmes of crypto-exposed businesses, while the SEC and others attempt to understand what unique considerations are required for these market participants.

“We should anticipate a number of organisations offering cryptocurrency as a medium of exchange to be unprepared for the impending regulatory wave,” he said.

“They would do well to employ experienced individuals and deploy leading technology, building out their financial crime programme ahead of time."

As VIXIO has reported previously, new crypto hires among regulators have also been mirrored among crypto market participants.

In 2021 alone, for example, Binance, the world’s largest cryptocurrency exchange by volume, increased the size of its compliance team by 500 percent.