A new report from US litigation consulting firm Cornerstone Research has revealed a 53% increase in crypto-related enforcement actions from the SEC in 2023 compared to 2022, signaling a busy year for the regulator in the cryptocurrency sector. Cornerstone disclosed this in a January 24 press release.
The 46 enforcement actions against players in the digital assets market in 2023 is its highest number since 2013, with 26 being litigations in US federal courts and the rest administrative proceedings. Similarly, the commission imposed over $281 million in fines last year, a $40 million increase from 2022.
The report comes weeks after the SEC published its annual enforcement results for the 2023 fiscal year. The SEC’s report revealed the regulator filed 784 enforcement actions and obtained orders for $4.949 billion in financial remedies in the 2023 fiscal year, the second-highest amount in the operational history of the agency. While the annual report accounts for all enforcement actions, including those against non-crypto-related firms, the Cornerstone Research report focuses only on enforcement actions against crypto-related firms.
About the Report
The report breaks down enforcement actions in the cryptocurrency space in numbers, confirming a clear focus on digital assets enforcement compared to previous years. Cornerstone Research also published data about the nature of allegations against crypto firms, types of defendants, monetary penalties imposed, and data about third-party agency assistance activities in the SEC’s crypto enforcement cases.
On monetary penalties, the report put the total amount of financial penalties against digital asset firms at $2.89 billion, with around 10% of the amount ($281 million) coming from settlements reached within the period of the observation. The report also indicated that 39% of the enforcement actions solely targeted individuals, down from 50% in 2022; the rest involved charges by the SEC against entities offering digital asset services or individuals representing those entities.
Additionally, 57% of the 46 SEC charges against digital asset firms are fraud allegations, with 61% alleging unregistered securities offerings. According to the report, the SEC routinely admits to receiving assistance from outside organizations in many enforcement actions. US Attorney’s Offices of different states, the Federal Bureau of Investigation (FBI), the Commodity Futures and Trading Commission (CFTC), and the Internal Revenue Service (IRS) are the outside agencies that offer the most outside assistance to the SEC in its enforcement actions.
The Cornerstone Research report also observed the litigation venue for the SEC’s enforcement actions, with the overwhelming majority (37) occurring in the US District Court for the Southern District of New York. Other venues for SEC enforcement actions include the Eastern District Court and other federal courts in California, Illinois, and Utah.
Former SEC Official-More SEC Enforcement is Likely
While reacting to an August 2023 enforcement action by the SEC against cryptocurrency firm Bittrex, former SEC Chief of Internet Enforcement, John Stark Reed, predicted more regulatory enforcement against crypto firms, claiming most companies in the cryptocurrency sector are playing “a short game of regulatory arbitrage.”
While expressing the opinion in a lengthy tweet last year, the former SEC chief blamed cryptocurrency exchanges for essentially trading securities without registration. Separate court judgments have declared that Bitcoin and XRP (Ripple) are not securities since Reed’s August 12, 2023 post.
SEC chairman Gary Gensler echoed similar sentiments in a recent op-ed of The Hill, an American newspaper. The SEC chair decried the lack of compliance among crypto firms in the US, suggesting that most crypto tokens are likely to be securities.
The Crypto Community Berates the SEC’s Regulation by Enforcement Mentality
Many stakeholders in the cryptocurrency industry have consistently criticized the Gensler-led enforcement-based approach to regulation despite lacking a consistent framework for cryptocurrency firms to follow in the United States. Observers also pointed out how the designation of some tokens as securities is arbitrary, with no clear description of what constitutes a security.
The concerns are not without legal support from US courts, as a federal judge recently ruled that Ripple’s native token, the XRP, is not a security. The commission also had to issue a public apology to Digital Licensing Inc. after a US District Judge ruled against the firm after freezing assets worth millions of dollars.
Despite the criticism from the community, it does not seem like the SEC plans to slow down with crypto-related enforcement in 2024, as the commission is gearing up to continue its long-winding legal row against Binance.
