Crypto Chronicles: Gary’s Wild Ride Through the Year of Crypto!

When the five voting members of the Securities and Exchange Commission (SEC) took their seats before lawmakers on Capitol Hill this September, an intense spotlight was cast on the agency’s approach to crypto regulation. House Financial Services Committee Chair Patrick McHenry (R-NC) challenged SEC Chair Gary Gensler to explain the hazy regulatory landscape that’s left many in the crypto sector scratching their heads.

“The laws are clear, and it’s written by the Supreme Court,” Gensler attempted to assert, but McHenry promptly redirected the conversation to SEC Commissioner Hester Peirce, probing once more about the agency’s stance on crypto regulation.

“We’ve taken a legally imprecise view to mask the lack of regulatory clarity,” Peirce shot back, standing just feet away from Gensler. “It’s always helpful to have Congress weigh in, but there certainly are some guidelines we could provide in this area that we have chosen not to.”

This brief exchange crystallized long-standing frustrations surrounding the SEC’s approach to crypto regulation, revealing a stark bipartisan divide on whether a significant portion of the crypto industry falls under the agency’s rules intended for traditional securities.

Gensler, who famously claimed that “everything but Bitcoin” should be subjected to SEC oversight, has wielded the agency’s enforcement power like a political tool. While President-elect Donald Trump cozied up to the crypto community, Gensler remained steadfast, issuing notices to several firms for alleged violations.

As Gensler hinted at his impending exit last month, he indicated he would step down when Trump officially takes office on January 20, 2025.

In line with one of Trump’s campaign pledges regarding crypto, the former president has expressed intentions to appoint former SEC commissioner Paul Atkins as Gensler’s successor.

“I would expect Paul Atkins to have a completely different approach,” stated Stephanie Avakian, a partner at WilmerHale and former SEC enforcement director, in a conversation with Decrypt. “He is both experienced and practical and is well-known.”

Crypto enthusiasts might be contemplating how Atkins’ leadership could potentially reshape the landscape, but the fate of ongoing lawsuits against major players like Binance, Coinbase, and Ripple Labs remains uncertain.

According to Anthony Tu-Sekine, a partner at Seward & Kissel, the SEC could face significant reputational damage if it were to abandon these prominent cases after previously investing considerable resources into them.

“The SEC is more like a supertanker than a race boat,” Tu-Sekine remarked. “Don’t expect Atkins to step in and drop all those cases within days. The team has worked tirelessly to reach conclusions on these matters, which ultimately led them to recommend pursuing legal action.”

Capitol Hill

When Gensler was nominated in 2021, there was a wave of cautious optimism within the industry. However, his experience teaching blockchain at MIT didn’t translate into the clear regulatory framework many had anticipated.

Rather than providing clarity, Gensler’s stance reinforced the belief that existing laws were sufficient to manage digital assets, positioning him as an adversary to innovation in the crypto space. A wave of enforcement actions ignited concerns among advocates over the SEC’s seemingly aggressive stance.

Reflecting on his tenure, Gensler defended the SEC’s commitment to enforcing compliance with securities laws in the crypto realm. Having likened the crypto market to the “Wild West,” he emphasized the agency’s role in safeguarding investors.

“This sector has seen significant harm to investors over the years,” Gensler stated. “Besides speculative trading and potential illicit activities, most crypto assets have yet to demonstrate sustainable use cases.”

On the same day, 18 states initiated a lawsuit against the SEC, accusing the regulator of overreach and abuse of power, a sentiment that had already been brewing in the political sphere and was seized upon by the incoming president.

“I will fire Gary Gensler on day one,” Trump vowed during a Bitcoin conference in July. “Once I take the oath of office, the anti-crypto campaign led by Joe Biden and Kamala Harris will be history.”

Gensler’s leadership faced intense scrutiny from Republican lawmakers on Capitol Hill, but the idea that existing laws were adequate received bipartisan criticism this year. A coalition of 71 Democrats in the House joined Republicans to support a crypto market structure bill, signaling a collective desire for reform.

Both chambers of Congress passed legislation aimed at repealing SAB 121, which mandated banks recognize digital assets as liabilities. Although President Biden vetoed the bill, a faction of 21 Democrats stood in opposition to the veto, illustrating the bipartisan support for a change.

The unprecedented political spending by the crypto sector in 2024 played a role in influencing lawmakers’ actions. As Election Day approached, Vice President Kamala Harris distanced herself from the SEC’s hardline stance, advocating for a more balanced regulatory framework.

As she ascended to the top of the Democratic ticket, Rep. Wiley Nickel (D-NC) noted that there were indications Harris would adopt a “balanced approach” towards crypto if she were to become president. Speculation arose around Mark Cuban potentially succeeding Gensler, but his aspirations ultimately fell short.

‘Not great for entrepreneurs’

Despite facing defeats in various court cases, the SEC had a profitable year in terms of enforcement actions, raking in substantial fines. Gensler’s administration pressed on with high-profile lawsuits, unfazed by the political pressures mounting against him.

In fiscal year 2024, the SEC amassed a staggering $8.2 billion in penalties from 583 enforcement actions impacting U.S. capital markets. Notably, $4.5 billion stemmed from a lawsuit against Terraform Labs and its founder, Do Kwon, who were held liable for fraud charges linked to the staggering $40 billion collapse of UST and LUNA in 2022.

This lawsuit was a significant win for the SEC, as a federal judge determined that Kwon and Terraform Labs had marketed LUNA and UST as securities. However, the SEC also faced setbacks, particularly in a significant case against Ripple Labs in New York.

A federal judge ruled that XRP, the token overseen by Ripple, was not inherently a security, leading to a $125 million fine for the company for violations tied to XRP transactions. While the SEC contested this decision, it had originally sought $2 billion in penalties when the case was initiated in 2020, prior to Gensler’s leadership.

“Charitably, the SEC got a bloody nose,” Tu-Sekine commented.

However, the SEC continues to pursue legal action against giants like Binance and Coinbase, both accused of operating as unregistered exchanges and broker-dealers.

In March, a federal court acknowledged that allegations against Coinbase regarding unregistered securities offerings were plausible, allowing the SEC’s case to advance. Likewise, in June, a judge ruled that the SEC’s case against Binance could also proceed, while dismissing some charges related to its Simple Earn product and specific token sales.

These ongoing lawsuits, alongside one against Kraken, are driving up legal expenses related to crypto enforcement actions, estimated by the Blockchain Association to reach at least $400 million, based on self-reported figures from its member companies.

“While this creates an abundance of work for lawyers, it’s not beneficial for entrepreneurs,” remarked Kristin Smith, CEO of the Blockchain Association. “To ensure compliance with U.S. securities laws, they must interpret various court opinions and SEC briefs with a fine-tooth comb.”

In a notable twist, some of the SEC’s previous actions have come back to haunt the agency. In August 2023, a judge dismissed the SEC’s case against DEBT Box, a crypto mining operation, mandating the regulator to pay $1.8 million in legal fees due to “false and misleading statements” made to secure a restraining order.

Enforcement threats

Moments after Gensler hinted at his resignation, a federal court in Texas delivered another setback for the SEC. The court invalidated the agency’s attempt to redefine “dealer,” which aimed to force decentralized finance projects to register as securities exchanges and brokers.

Under Gensler’s watch, the SEC expanded its focus on crypto exchanges and digital asset issuers, but this year saw a marked increase in enforcement threats. Issuing Wells Notices, the SEC signaled a potential crackdown on previously unregulated areas like decentralized finance (Uniswap Labs), NFTs (OpenSea), and gaming (Immutable).

The SEC also sent enforcement warnings to companies like Robinhood, scrutinizing its cryptocurrency offerings after the trading app aimed to “register” its services with the agency.

“This is not how Americans expect their government to operate,” Robinhood’s legal chief, Dan Gallagher, testified before Congress. “Instead of providing clear rules that the industry desperately needs, the SEC has targeted individual firms through aggressive enforcement.”

Ultimately, Gensler’s leadership instilled a significant chilling effect on the crypto landscape, noted Katherine Snow, general counsel at Thesis. This environment has forced companies to either halt projects or relocate overseas, prompting the U.S. to expedite its regulatory efforts to remain competitive on the global stage.

However, Snow acknowledged one notable downside to Gensler’s impending exit. Over recent years, industry legal experts have united against what many perceive as an existential threat.

“Having a common adversary allowed everyone to rally together,” Snow reflected. “It will be intriguing to see the varied strategies employed by different trade associations as we step into this new era of the SEC.”

Edited by Sebastian Sinclair