Crypto Nemesis: The SEC’s Unlove for Bitcoin Explained
The SEC is sometimes dubbed the crypto nemesis. Here’s a brief recap of how it has been treating crypto over the years.
The U.S. Security and Exchange Commission (SEC) has never been a fan of cryptocurrencies, with some commentators calling it the crypto’s nemesis.
With the SEC announcing plans to increase oversight on crypto projects in 2023, here’s a brief recap of how the SEC-crypto-verse relations developed over the years, and what could happen next.
There were times when the SEC didn’t care
Bitcoin – let alone altcoins, Ethereum included – were not always buzzed about.
Incepted in 2008 and launched in 2009 by the pseudonymous Satoshi Nakamoto, BTC and its underlying technology blockchain were viewed mostly as the kind of stuff computer nerds are into.
It took several years for the first big projects in the crypto-verse like the crypto exchange Coinbase (2012), the analytical site Coinmarketcap (2013), the media outlet Cointelegraph (2013), the crypto exchange Gemini (2015), and others to appear.
It all, arguably, changed in 2017. That year the SEC rejected the application for a Bitcoin ETF put forward by the Winklevoss twins, claiming that the underlying Bitcoin market was still too manipulable, volatile, and resistant to surveillance.
It also heeded the crypto market due to the bull run that saw the BTC price skyrocket from $900 to the $20 thousand mark as well as ubiquitous Initial Coin Offerings (ICOs), many of which were indeed dubious if not outright fraudulent.
This is when the SEC, which focuses predominantly on subjecting assets to the “Howey Test” to determine whether they are securities, started to scrutinize the industry more closely. But that scrutiny, let’s put it diplomatically, was confusing, to say the least.
In the course of 2018, Clayton said that cryptocurrencies are securities just like any other out there, only to add shortly after that BTC is not.
“Cryptocurrencies are replacements for sovereign currencies…[they] replace the yen, the dollar, the euro with bitcoin. That type of currency is not a security,” he told CNBC that year.
Ethereum, which went live in 2015, was also classified as not a security in 2018.
Ripple, however, was less lucky, with the SEC taking it to court and the lawsuit still being not settled to this day.
Ton, Telegram’s much-anticipated token, also went down Ripple’s path. In 2020, Telegram was forced to return $1.2 billion to investors and pay an $18.5 million penalty to settle the SEC charges.
Talk of the “Wild West”
Though a supposition, for some time the SEC seemed to think that if you partially deal with something long enough, it will magically disappear or lose importance.
Only it did not. On the contrary, the crypto industry turned out to be much more robust than the authorities expected, incrementally yet steadily turning mainstream, with the ever-growing market capitalization reflecting the trend.
Bitcoin has become a legal tender in countries like El Salvador and has been widely used in Latin America and Africa as a means to tackle the effects of inflation, which makes money evaporate in the blink of an eye. Sometimes literally.
In 2021, following a new bull run, BTC hit the $60,000 mark, attracting an even greater number of people, making it for the SEC even harder to ignore the industry or let it play by some obscure playbook that can be changed on the go.
And so the SEC once again revived its favorite discussion: the security argument.
After Clayton stepped down in December 2020, Gary Gensler, the former Goldman Sachs investment banker who took over the Chairman’s post in 2021, made it clear from the outset that the SEC considers many cryptocurrency coins and tokens to be securities under the “Howey Test,” saying, "If somebody is raising money selling a token and the buyer is anticipating profits based on the efforts of that group to sponsor the seller, that fits into something that's a security" and promised more scrutiny for crypto exchanges.
Unlike Clayton, who seemed to be simply not too interested in crypto but not zealously against it, Gensler regularly uses different venues to tell people just how bad crypto is. In one of his latest anti-crypto rants, together with SEC commissioner Caroline Crenshaw, he told the US Army soldiers that crypto is “the Wild West”, “highly speculative” and “non-compliant.”
“Most of these [tokens] are not complying with the securities laws, but they should be,” he added, with Crenshaw, equally skeptic, telling the troops to invest “as much as possible” in a Thrift Savings Plan, a government-sponsored retirement plan for federal employees and service members.
Not everyone in the SEC is as hostile
Though the SEC lives up to its reputation of being largely anti-crypto, it is not home to crypto skeptics only.
Hester M. Peirce, sworn in on January 11, 2018, is far from being Gensler-like. Dubbed “Crypto Mom”, she is considered crypto’s staunchest ally in the SEC, though she does not believe herself to be a crypto advocate.
Rather, she simply understands why the crypto-verse feels unsettled about Gensler’s behavior and the lack of adequate guidance to the industry on the regulations that apply to cryptocurrencies and digital assets.
In her latest interview, she admitted that the SEC crypto regulator “has not done a good job,” and that “we just haven't made progress in the five years I've been here”, adding that the agency doesn’t have a reputation for handling innovation well.
This begs the question: How is the SEC planning to increase the regulatory oversight of the industry if five years into it, the agency still does not understand its potential, focusing predominantly on the negative developments such as the collapse of FTX?
For the time being, the answers can only be speculative.
It is clear that in the year ahead the SEC, as well as another key agency the Commodity Futures Trading Commission (CFTC), will likely step up their regulatory game.
But it is unclear to what extent – and how exactly will this affect the industry. Many coins may indeed end up being classified as securities – even Ethereum, due to its switch from the Proof-of-Work to the Proof-of-Stake mechanism.
In his interview with Gagarin News, the well-known Bitcoin maximalist Hodlonaut commented on the SEC’s conduct, and said that he also expects “very serious attacks on Bitcoin from the regulatory side coming in the next few years”, adding that “I think they're seeing more and more that Bitcoin is an actual threat.”
It is hard to disagree with this statement – just as equally hard as it is to deny that even if the SEC classifies Bitcoin as a security, it will hardly impact its raison d’etre. BTC was created as a peer-to-peer monetary system. And thus does not need approval from the SEC, CFTC, or any other regulatory body.
