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Has the SEC lost its independence, becoming a puppet of government politics rather than a fair regulator in the crypto industry? Experts weigh in.
Consecutive Losses for the SEC
The U.S. SEC has been under scrutiny recently, particularly within the crypto community. The most notable case is the partial victory for Ripple (XRP) in July 2023. The U.S. District Court for the Southern District of New York ruled that XRP sold through Programmatic Sales did not qualify as investment contracts, meaning they were not securities.
This was a significant win for Ripple and a setback for the SEC, which has been keen on regulating the crypto industry as if it were dealing with traditional securities. XRP sales through exchanges, where buyers and sellers don’t know each other, were ruled as not securities. The court found that these transactions didn’t meet the third prong of the Howey Test, which looks at whether there is an expectation of profit based on the efforts of others.
However, sales directly to institutional investors were considered securities. This mixed ruling showed that while the SEC’s regulatory reach is there, it’s not absolute.
In another critical blow, in August 2023, the SEC faced defeat in its case against Grayscale Investments. The U.S. Court of Appeals for the D.C. Circuit ruled that the SEC acted “arbitrary and capricious” by denying Grayscale’s application to convert its Bitcoin Trust into a spot Bitcoin exchange-traded fund (ETF). The court pointed out that the SEC had previously approved Bitcoin futures ETFs, which operate on similar market surveillance mechanisms as the proposed spot BTC ETF.
This inconsistency suggested the SEC’s flawed logic and was a substantial win for Grayscale and the entire crypto industry, questioning the SEC’s regulatory stance.
The SEC’s stance on Ethereum (ETH) has also been a rollercoaster. In May 2024, the SEC approved applications to list and trade spot Ethereum ETFs. This was a big deal because up until then, only Ethereum futures ETFs had been given the green light. By approving spot Ethereum ETFs, the SEC indirectly acknowledged Ethereum more as a commodity than a security.
This classification could limit the SEC’s regulatory power over Ethereum and potentially other crypto assets, shifting more regulatory responsibilities to the Commodity Futures Trading Commission (CFTC).
The SEC’s recent defeat in the case against Digital Licensing Inc., also known as Debt Box, adds to its string of setbacks. Just days ago, a federal judge ordered the SEC to pay approximately $1.8 million in legal fees after dismissing the case without prejudice, meaning it could potentially be reopened.
The SEC had accused Debt Box of defrauding investors of at least $49 million. However, the case was marred by issues, including false statements and misrepresentations, leading to the resignation of two SEC lawyers. The judge criticized the SEC’s conduct, particularly regarding the temporary restraining order and asset freeze. Debt Box celebrated the ruling as a step toward justice and transparency.
The Ongoing Tussle Intensifies
The SEC has been under fire for its heavy-handed regulation of the crypto industry, and recent developments have only intensified the scrutiny. In June 2023, the SEC initiated a lawsuit against Coinbase, alleging it never registered as a broker, national securities exchange, or clearing agency, thereby evading disclosure requirements. Coinbase has argued that the SEC’s enforcement approach is designed to stifle the digital assets industry.
Remarkably, the SEC’s says – over and over again – that it doesn’t matter if the industry can comply with the rules. The SEC is bent on choking the digital asset industry, and is refusing to provide the necessary rules the industry has requested in order to tighten the squeeze.
In a recent filing, Coinbase claimed that the SEC is not interested in creating clear and fair guidelines for the industry but rather aims to “choke” it. Coinbase pointed out that even SEC Commissioner Hester Pierce, a known pro-crypto advocate, has criticized the agency for its lack of transparency and for hindering innovation.
The SEC’s actions against Ethereum-related entities have also raised eyebrows. Despite the SEC approving spot Ethereum ETFs, signaling ETH’s status as a commodity, the agency continues to target major players in the Ethereum ecosystem. Uniswap (UNI), for example, received a Wells notice from the SEC, indicating potential securities law violations. Uniswap and other Ethereum-based companies argue that the SEC’s classification of tokens as securities is outdated and inconsistent.
Consensys, founded by Ethereum co-founder Joe Lubin, has taken a more proactive approach by suing the SEC. The SEC had issued a Wells notice to Consensys, focusing on its MetaMask wallet and its staking features. This lawsuit is an effort to push back against what Consensys sees as the SEC’s “unlawful seizure of authority.”
Community and Experts Weigh In
The recent actions of the SEC have sparked a wide range of discussions across social media, with many questioning whether the agency has become a puppet of the government. On Twitter, the sentiment is one of frustration and disbelief. Users are vocal about their dissatisfaction with the SEC’s decisions, particularly President Biden’s veto of a bill aimed at repealing SAB 121.
Biden just Vetoed the only pro-crypto bill to ever come across his desk. This was a layup. SAB 121 is an anti-crypto rule put in place by Gensler’s SEC to stop banks from holding crypto. Crypto hates it. The banks hate it. All he had to do was not veto the repeal.
BIDEN HATES CRYPTO!!! He is siding with the anti-crypto SEC. WE NEED TRUMP.
On Reddit, the discourse is even more intense, with users expressing strong opinions about the SEC’s actions. User sentiments on Reddit reflect a deep mistrust of the agency and suggest that political motivations might be driving its decisions. For instance, some users speculate that the SEC is acting under the influence of lawmakers who do not fully understand the crypto market.
One user pointed out the inconsistency in the SEC’s decisions, questioning why the agency approved a futures ETF for what it considers an unregistered security. Another user expressed skepticism about the SEC’s motives, suggesting that the agency might be trying to time the market to dampen bullish trends in the crypto space. Comments also reflect a sense of frustration over the SEC’s perceived failure to provide clear guidelines, leading to legal uncertainties and challenges for crypto businesses.
Financial expert Alexey Krichevsky, author of the Telegram channel “Economism”, commented exclusively to Global Crypto News, echoed these sentiments. He suggested:
The SEC lost its independence just with Biden’s presidency. Before that, the commission had much more influence not only in the crypto market but also in other assets. Now, it is clear that the Biden administration is actively flirting with cryptocurrency users in the U.S. while trying to limit their crypto assets and lobbying for the digital dollar.
Krichevsky argued that the administration’s actions, including the rapid approval of Bitcoin and Ethereum ETFs, indicate a political strategy. He also challenged the rapid pace at which the SEC approved the Ethereum ETFs, implying that such decisions could be politically motivated rather than based on thorough regulatory review. He mentioned:
The SEC instructed investment houses to correct several flaws in a couple of days to approve the launch as quickly as possible. Unless this is a tool in the political fight against Trump, who is openly in favor of cryptocurrencies, there are no other options — the mood of the authorities could not change so quickly.
While the frustration and suspicion are palpable, it’s essential to consider the SEC’s perspective and its mandate to protect investors. The agency has argued that its regulations are designed to safeguard the financial system and ensure transparency. Clear, fair, and consistent guidelines are necessary to foster innovation while ensuring investor protection. The perception of the SEC as a political tool undermines its credibility and effectiveness, and it should change.
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