After the cryptocurrency crash comes the SEC crackdown

It’s been a rough couple of months for some people who’ve had it easy for a long time. A growing number of cryptocurrency trades may finally face some consequences for their alleged illegal actions.

On Monday, the Securities and Exchange Commission indicted 11 people behind Forsage, calling it a $ 300 million Ponzi scheme disguised as a smart contract system. It was less than a week after the New York Times reported that the cryptocurrency trading platform Kraken was being investigated by the Treasury Department for violating US sanctions against Iran. And just days earlier, the FBI and a US district attorney in New York indicted three former Coinbase employees for insider trading.

Which agency is responsible for regulating cryptocurrency is unclear. Both the Commodity Futures Trading Commission and the SEC claim jurisdiction here. The SEC, however, seems particularly interested in prosecuting the crypto schemes that fall within its purview, which appears to be most of them.

“The SEC is in the midst of an ongoing assault on crypto companies from every direction,” John Reed Stark, a cybersecurity expert and former SEC law enforcement attorney, told Recode. Stark noted that the agency has expanded his crypto unit and SEC Chairman Gary Gensler has made no secret of his belief that many cryptocurrencies are securities and that he intends to regulate them as such.

So even if it’s hot outside, we’re in the middle of a crypto winter that may never end. During the pandemic, the cryptocurrency market jumped to $ 3 trillion, aided by new platforms that made investing easy enough for anyone to do. Since last November, however, the market has collapsed. It is now worth around a third of what it was at its peak and there is no sign that the value will recover significantly any time soon. The incident devastated some of the companies operating in this space and their customers as well.

Now, the law is coming for some cryptocurrency companies and their leaders. But it remains to be seen exactly what consequences, if any, many of these companies and the people behind them will face.

Unlike traditional banks, when crypto lending platforms go upside down, there are no protections in place to ensure investors are healthy. Two crypto lending platforms, Celsius and Voyager, went bankrupt in July and their clients may never get their money back. Some supposedly safe crypto investments called “stablecoins,” which are pegged to the value of a fiat currency such as the US dollar, have also been shown to be by no means stable. Last May, the value of the stablecoin Terra collapsed, dragging with it the Luna coin, whose value was tied to that of Terra. Luna was once worth up to $ 116. Now, it’s worth a fraction of a cent.

But as investor losses mount and law enforcement’s expanded crypto weapons begin to work, it appears the day of reckoning has finally come for some of these companies, which have operated in a space with few rules. Outright scams obviously didn’t follow the rules at all. But some of the more legitimate companies, presumably, have also played freely with them.

“The arrogance and arrogance in the cryptocurrency realm are so out of proportion,” Stark said. “They are always belligerent, combative and they call the SEC sketched. ”

“I’ve never seen anything like it and I’ve been training for over 30 years,” he added.

Again, the SEC is just one of several government agencies looking for cryptocurrencies. And when many people lose a lot of money, the government will pay even more attention. But there may not be much it can do for some people, as cryptocurrencies aren’t regulated like traditional banks and stocks, something many cryptocurrency investors didn’t realize until it was too late.

“With so much new money pumping up symbolic values, so many people wanted to walk in without understanding anything about space,” said Matt Binder, a reporter for Mashable who also hosts Economy scam, a podcast dedicated to crypto and Web3 scams. “And the industry took advantage of a lot of those people.”

It didn’t help that some of their favorite celebrities endorsed these projects, or that some of these companies were apparently so full of money that they could buy ad space at the most expensive show in town. It also didn’t help that cryptocurrencies have become as easy to buy as an ATM transaction. And it didn’t really help that many people approached cryptocurrencies knowing little, but assuming they would have the same protections they have from more regulated institutions like traditional banks and investment firms.

Stark predicts that we will see more action against these crypto companies in the coming months and years, with the SEC focusing its efforts not on the petty scammers but on the gatekeepers they use for their scams: “trading exchanges, platforms, whatever you want to call them. AND think any other agency investigating the cryptocurrency world will get a lot of help, perhaps from the people within it.

“When companies start engaging in this sort of thing, you get people who want to be whistleblowers or become whistleblowers,” Stark said. “And when prosecutors start snooping, people can become whistleblowers very quickly.”

Molly White, who has recounted various Web3 failures on Web3 Is Going Just Great, is still not so sure that the increased scrutiny, investigation and accusations will add up to real change.

“Insider trading fees seem like a drop in the bucket compared to the amount of insider trading that has been clearly known to be happening on Coinbase and elsewhere, but that’s at least something,” he said. “I’m worried about the slowness with which these actions are emerging in an industry where people can in the meantime perpetrate one scam after another.”

“I believe there is progress when I see it,” he said.

If regulators can’t make this progress in court, perhaps at the very least all the attention that the cryptocurrency crash has gotten will discourage potential investors from investing in a volatile market they don’t really understand and offers them little protection.

“I think these crackdowns can help keep the public away from cryptocurrencies,” Binder said. “There will be some companies that will try to ‘get legit’, but in the end they are still a cryptocurrency company, selling the dream of getting rich by trading speculative assets, with no real product or service.”

This won’t do much, however, for people whose dreams have already turned into nightmares. White said that while some of the previous cryptocurrency loss stories were funnier and the victims less understanding (see: “All My Apes Gone”), that’s no longer the case. “Now we see people writing letters to a bankruptcy judge about how they are financially ruined and thinking about suicide, “he said.

Or as Binder said, “We have some people who have won the lottery and a lot of others who have lost everything.”

This story was first published in the Recode newsletter. Sign up here so don’t miss the next one!

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