Week In Crypto: ’Aggressive Enforcement’ Needed On Digital Assets, Say SEC Advisors

April 14, 2023
Advisors to the US Securities and Exchange Commission (SEC) call for “aggressive enforcement” targeting crypto firms, Paxos retreats from Canada and the Bank of England endorses prudential rules for stablecoins.

Advisors to the US Securities and Exchange Commission (SEC) call for “aggressive enforcement” targeting crypto firms, Paxos retreats from Canada and the Bank of England endorses prudential rules for stablecoins.

In a new letter to SEC chair Gary Gensler, the SEC’s Investor Advisory Committee (IAC) has expressed support for the agency’s increased enforcement activity against crypto-asset businesses.

“The SEC should continue to be aggressive in bringing enforcement actions against companies that are violating the federal securities laws in the crypto space, including issuers, custodians and those acting as unregistered platforms,” said the AIC.

The IAC’s statement follows several actions in 2023 that have helped clarify the SEC’s stance on crypto-assets, including an Investor Alert and last month’s Wells notice sent to Coinbase (a Wells notice typically precedes SEC enforcement action).

The IAC said it supports the SEC’s characterisation of crypto firms as “non-compliant rather than unregulated”, and added that this position will help to raise standards and reduce uncertainty among firms.

“We believe that virtually all, if not all, crypto tokens are securities, and that they and the platforms and custodians dealing with them are subject to regulation under the federal securities laws to protect investors,” said the IAC.

“Accordingly, the offering of crypto-asset securities and the platforms trading them should comply with the registration, disclosure, anti-fraud and other investor protector provisions of the federal securities laws.”

The IAC also warned against any attempt to “carve out” crypto-assets from federal securities laws, calling legislative proposals to this effect “unfortunate and disturbing”.

This would include the Lummis-Gillibrand Responsible Financial Innovation Act, introduced in June last year, and the Digital Trading Clarity Act, introduced in September last year.

Since the crypto markets peaked in November 2021, the IAC pointed out that crypto investors have lost about $2trn during the market downturn — equivalent to the annual GDP of major economies such as Italy, Canada or Brazil — in addition to further losses from fraud, mismanagement and financial crime.

In 2021, the US Treasury estimated that $14bn worth of digital asset-based crime took place worldwide, nearly double its estimate for 2020.

Similarly, the number of crypto scams rose by more than 60 percent in 2021, while the total value of stolen crypto-assets rose by more than 80 percent.

In light of these figures, the IAC questioned whether the SEC has the manpower to effectively police the crypto industry.

In 2022, the SEC brought 30 enforcement actions against crypto-asset market participants, despite a 5 percent reduction in the total size of the SEC’s Enforcement Division since 2016.

“This raises questions as to whether the SEC has the resources to keep up with the significant growth and scale of crypto-assets, along with its other oversight responsibilities in the securities market,” said the IAC.

But in general, in terms of the cases selected by the SEC for enforcement action, the IAC said the regulator is on the right track.

“Given the growth and issues in the digital asset securities market, we encourage the SEC to aggressively continue to assert authority over crypto-assets that are securities and over trading platforms that list or transact in such crypto-asset securities,” it said.

Paxos packs up in Canada

Paxos, a New York-based crypto brokerage and stablecoin issuer, has announced that it is exiting the Canadian market.

In a note to customers, Paxos said that on June 2 this year that customers located in Canada will no longer be able to transact from their Paxos account, except to withdraw their funds to a bank account.

Going forward, Paxos said it plans to “re-enter” the Canadian market, and will continue to “assess its readiness” to do so by cooperating with the Ontario Securities Commission (OSC).

The retreat from Canada will put further pressure on Paxos’ business, after regulators in New York ordered it to cease issuance of Binance USD, previously the world’s third-largest stablecoin, and redeem all existing tokens by February 2024.

Paxos’ change of course in Canada comes amid a similar crackdown on unregistered crypto firms north of the US border.

In March 2021, the OSC gave all crypto-trading platforms one month to initiate compliance discussions with its staff, with a view to becoming regulated under Ontario securities laws.

Since then, Ontario has turned away several of the biggest names in the crypto industry, cutting them off from almost 40 percent of Canada’s 38m people.

In June 2021, for example, Binance announced that it would cease doing business with users in Ontario, after the OSC sued several other crypto exchanges.

In the 30 days prior to Binance’s announcement, the OSC had charged Bybit, KuCoin and Poloniex with violations of Ontario securities laws — cases that ultimately resulted in these exchanges being banned from the province.

At present, Binance is still barred from doing business in Ontario, and this position was reiterated by an OSC order issued in March 2022.

In the meantime, other major crypto exchanges have submitted pre-registration undertakings (PRUs) to the OSC, which allows them to keep operating in lieu of full registration.

Last month, Coinbase, Gemini and Crypto.com all submitted PRUs to the OSC. Binance also submitted a PRU last month to the Alberta Securities Commission (ASC), but not to the OSC.

Stablecoins need prudential rules, say BoE, IMF

This week Bank of England (BoE) Governor Andrew Bailey said that stablecoins need to be regulated in the same way as commercial bank money.

Speaking at the Institute of International Finance in Washington, DC, Bailey said there is no place for unregulated stablecoins that “purport” to be money but do not have an “assured value”.

"At the Bank of England we have concluded that the public should expect assured value in digital money and confidence in this is needed to underpin financial stability," he said.

“For stablecoins to function as money they will need to have the characteristics of, and be regulated, as inside money,” he said, using another term for commercial bank money.

In its 2023 Financial Stability Report, published this week, the International Monetary Fund (IMF) made similar comments in a discussion of market turbulence following the collapse of the TerraUSD stablecoin.

“The collapse of multiple entities in the crypto-asset ecosystem has again made the call more urgent for comprehensive and consistent regulation and adequate supervision,” said the IMF.

“Entities carrying out multiple functions should be subject to additional prudential requirements, and stablecoin issuers should be subject to strict prudential requirements.”

The IMF added that the cross-sector and cross-border nature of crypto “limits the effectiveness” of uncoordinated national approaches.

Instead, the agency said that major jurisdictions should take proactive steps to align regulations with one another to prevent regulatory arbitrage.

“Strong international cooperation, supported by robust, comprehensible, globally consistent crypto regulation, is essential to provide guidance, ensure consistent implementation and contain spillover risks,” it said.

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