The inflow of new investors into the crypto industry has been a boon for adoption but has also come at a cost.
Now more than ever, the crypto industry is under the watchful eye of regulators concerned about market manipulation, investor protection, and the potential for crypto to facilitate illicit activities.
The United States Commodity Futures Trading Commission (CFTC) has warned that more enforcement actions will be taken against the crypto ecosystem in the coming six months to two years.
On May 6, during the 27th Annual Milken Institute Global Conference, CFTC Chair Rostin Behnam said that with the rise in the price of cryptocurrency and the inflow of new, inexperienced retail investors, there will be another cycle filled with crypto-centered scams and frauds.
“We’re going to probably see in the next 6 to 18 months, or 6 to 24 months, another cycle of enforcement actions because of this cycle of asset appreciation and interest by retail investors,” he said.
With no legal framework presently in place to regulate crypto service providers, the CFTC chair expects watchdogs to crack down on crypto firms.
Since 2023, the U.S. Securities and Exchange Commission (SEC) and the CFTC have cracked down heavily on crypto firms, with both agencies recording their largest number of enforcement actions against crypto firms last year.
According to research by the litigation consulting firm Cornerstone Research, SEC enforcement actions reached a 10-year high in 2023, with digital assets taking a “top priority” for the commission’s attention.
The SEC tripled the number of administrative proceedings in 2022 and initiated 46 enforcement actions in 2023. The regulator imposed $281 million in fines for settlements.
One-third of all CFTC crypto enforcement actions in 2023 were against crypto firms. The CFTC took 47 enforcement actions representing over one-third of the total enforcement actions brought by the commission since 2015.
U.S. regulators have multiple cases pending against U.S. crypto firms such as Kraken, Binance and Coinbase. Regulators continued their enforcement efforts in 2024 when, in April, the U.S. Justice Department arrested the founders of a privacy-focused Samurai wallet on money laundering charges. In May, the SEC issued a Wells notice against Robinhood.
U.S. regulators target broker-dealers and mixers
Amid ominous warnings from the CFTC chair and increased enforcement actions against crypto firms, crypto companies are bracing for regulatory actions in the next few years.
Patrick Gruhn, a former partner at Crypto Lawyers, a Swiss law firm, told Cointelegraph that the SEC and other U.S. regulatory bodies’ enforcement actions indicate they are targeting crypto firms with a broker-dealer business model:
“The SEC targets business models and firms that, from a high-level perspective, compete with traditional finance, e.g., broker-dealers. If a project or company allows people to speculate on the price of crypto assets or generate interest-like payments, such a firm or project team is at risk, whether it considers itself decentralized or not.“
Another area of focus for law enforcement agencies seems to revolve around privacy and mixer tools. U.S. agencies have sanctioned popular crypto-mixing services such as Tornado Cash and, more recently, arrested the founders of another privacy-focused wallet services provider, Samurai.
Recent: Despite Bitcoin price volatility, factors point to BTC’s long-term success
While the crypto community has mixed reactions to using mixing and privacy-focused services, a majority opposes the persecution of the founders and creators of such services for writing neutral code and doing nothing illegal.
Lack of U.S. crypto regulation could impact industry
The lack of a legislative framework and enforcement jurisdiction for different agencies has created more complexities for crypto firms and law enforcement agencies alike.
Keith Blackman, a partner in the New York City office of the Bracewell law firm, told Cointelegraph that in the past, the CFTC chair has often expressed concern about the lack of a comprehensive regulatory framework governing cryptocurrencies in the U.S., starkly contrasting to SEC Chair Gensler’s eagerness to proceed with enforcement actions without the need for crypto-specific regulations.
According to Blackman, Behnam’s comments suggest that “the CFTC is gradually aligning its perspective with the SEC.”
He added that new crypto companies would be “deterred from entering the market with the added threat of CFTC enforcement without clear-cut regulations. Existing companies, meanwhile, will need to invest more resources in legal and compliance counsel, increasing costs and potentially stifling innovation.”
Neal Levin, a partner at Rimon Law, told Cointelegraph that poor policies and lack of legislation lead to uncertainty about how to behave. If the regulators and enforcers have no legislative framework, they will attempt to fit their business models into the existing regulatory framework:
“Using crackdowns is a means of shaping behavior and providing guidance short of new legislation. However, this is certainly hampered and will continue to be hampered by the ongoing uncertainty over the classification of digital assets, i.e., whether they are to be deemed ‘securities,’ as we’re seeing with Robinhood and the SEC currently and several other cases.”
At a time when other jurisdictions have or are actively developing comprehensive crypto regulations, the U.S. is still following the “regulations by enforcement” approach, which has already forced several established businesses to modify their offerings or shut down entirely.
Recent: EU crypto regulations undermined by lack of enforcement, say observers
Kraken has already shut down its staking-as-a-service platform in the U.S., while the CFTC has charged the operators of Kraken with running an illegal digital asset derivatives exchange.
Despite the dramatic uptick in regulator actions against crypto firms, Wall Street is warming up to digital assets.
The launch of spot Bitcoin exchange-traded funds and investment from traditional financial institutions highlights the growing interest of the traditional financial sector in the crypto market.
Some market observers have also noted that crypto holders are growing as a political force in the U.S., making the prospect of more friendly regulation seem not so impossible.