Crypto swindlers, beware: The SEC is beefing up its policing of digital assets

The Securities and Exchange Commission is ramping up its fight against crypto crime.

On Tuesday, it unveiled plans to add 20 new employees to its Enforcement Division’s Crypto Assets and Cyber Unit, which, once filled out, will have 50 staffers. Their task? Hunting down alleged securities law offenders dealing in all things crypto—whether it be stablecoins, exchanges, non-fungible tokens, or lending and staking protocols.

“Crypto markets have exploded in recent years, with retail investors bearing the brunt of abuses in this space,” said Gurbir Grewal, director of the SEC’s Enforcement Division, in a statement. “The bolstered Crypto Assets and Cyber Unit will be at the forefront of protecting investors and ensuring fair and orderly markets in the face of these critical challenges.”

Led by Chair Gary Gensler, the SEC has made it no secret that it sees a large swath of the $1.7 trillion crypto markets as its terrain, and so, Tuesday’s news should really come as no surprise.

Gensler, who once called crypto a “Wild West” that’s “rife with fraud, scams, and abuse,” was asking Congress for more resources—or, in other words, lawyers—to explore the market back in September, after all.

And even without them, the SEC’s been quite active in cracking down, or at least trying to. Remember the Coinbase Lend drama? Or the BlockFi settlement? How about the DINO, or decentralized-in-name-only, project it filed charges against last year? In total, since launching in 2017, the Crypto Assets and Cyber Unit has brought more than 80 enforcement actions linked to crypto asset offerings and platforms that netted more than $2 billion in penalties, the SEC says.

The regulator may be winding up to take an even more aggressive and ambitious view of overseeing crypto in the months and years ahead, though.

Just looking at Gensler’s public comments as a proxy for a potential forthcoming battle, and it’s clear there’s plenty the regulator may be looking to explore. The SEC chair, for instance, has repeatedly raised concerns about unregistered securities masquerading as tokens on crypto exchanges, investor protections on decentralized finance protocols, and stablecoins——all areas named as points of emphasis for the SEC’s newly expanded crypto enforcement unit.

“It’s a shot across the bow that the SEC is going to be bringing all sorts of cases in this space,” says John Reed Stark, who led the SEC’s Office of Internet Enforcement when it was set up in 1998 and is now a cybersecurity consultant, of the latest announcement.

Still, the industry and its allies in Washington, D.C. have concerns about the SEC allocating more resources to enforcement, rather to other divisions that deal with crypto. “Thoughtful, well-informed regulation is what the crypto ecosystem needs, not reg by enforcement,” Alexander Grieve, a vice president at Tiger Hill Partners, tweeted Tuesday. SEC Commissioner Hester Peirce, the sole Republican currently on the agency’s top panel, summed it up on CoinDesk TV by saying that the agency’s latest move may be putting the “cart before the horse.”

“Having an enforcement team that’s dedicated to this area is fine,” Peirce said, “but where’s the regulatory team dedicated to this area?”

The reality remains, though, that federal lawmakers are still debating how exactly to regulate the market, with questions as basic as who oversees what still looming in Congress. And until those can be addressed, BTIG director of policy research Isaac Boltansky tells me 2022 is still on track to be a year of regulation by enforcement, where “anything and everything is on the table for the SEC.”

“Congress isn’t going to act. The Biden administration doesn’t seem to think as though it has a strong footing on these issues,” Boltansky says. “And it’s clear that Chairman Gensler wants a say, and the only way forward is jawboning in the public and enforcement actions.”

Declan Harty
@declanharty
Declan.harty@fortune.com

DECENTRALIZED NEWS

Credits 🚀 

Goldman Sachs has offered its first Bitcoin-backed loan, with Coinbase on the other end of it.

California is working toward developing some cryptocurrency guidelines for companies operating in the Golden State.

In a first for the Wall Street trading giant, Jane Street has borrowed $25 million in USDC (with plans to up that to $50 million) through the DeFi marketplace Clearpool.

Crypto lobbying is not dying down on Capitol Hill, with The Block tallying $4.4 million of industry lobbying spent the first quarter. 

Valkyrie wants to give sophisticated, traditional investors access to the Avalanche network. 

Debits 🐻 

Labor Department officials have "grave concerns" over Fidelity's plans to open up 401(k) accounts to Bitcoin.

MicroStrategy, the Bitcoin-holding, Michael Saylor-led company, has named a new CFO following a quarter of declining revenues and widening losses. 

Police officers from Fairfax County, Virginia, may soon have their pensions tied up in crypto-yield farming.  

Gas (a.k.a. transaction) fees on Ethereum spiked as NFTs for virtual land in the Otherside, the Bored Ape Yacht Club-linked game from Yuga Labs, went up for sale. (Yuga Labs then refunded some of the fees for people who weren't able to buy any digital land because of technical issues.)

Solana went dark for seven hours over the weekend thanks to a rush of bot activity tracing back to an NFT minting program called Candy Machine.

FOMO NO MO

So, how was Bitcoin 2022? You might think that a conference dedicated to the OG crypto might carry a certain air of levity. Prices were battered by early April when the flocks of Bitcoin maximalists descended onto Miami for Bitcoin 2022, but there was still plenty going on that should have attracted excitement: Wall Street was buying in, so too were everyday Americans. It was official, crypto had entered the mainstream. And yet, as The Verge's Elizabeth Lopatto wrote last week, the tone at Bitcoin 2022 was "primarily aggrieved."

From the article:

When Russia invaded Ukraine earlier this year, cryptocurrency donations — both of Ethereum and Bitcoin — were funneled to the Ukrainian government. This was a real-world test case of claims crypto proponents had made for a long time: that non-state money had important uses.

So the panel “Wartime Bitcoin” appeals to me — it suggests a discussion of these issues. Luke Rudkowski, the panel’s moderator, walks out in a T-shirt that says “Epstein didn’t kill himself.” Epstein didn’t have his bank account frozen by the government, says Ben Dichter, the spokesperson for the Canadian Freedom Convoy truckers.

This is my first inkling of the panel’s true theme. It turns out we will not be discussing the use of Bitcoin during wartime. We are, instead, going to discuss the war on Bitcoin.

“I’m into Bitcoin to take revenge on the government,” says Francis Pouliot, founder of Bull Bitcoin. He runs an exchange for cryptocurrency to fiat and says he can’t wait to go out of business.

This group is not enthused about the public embrace of crypto. “The bigger the communities get, the more we get infiltrated with fucking retards,” says Aleksandar Svetski, a co-founder of Amber, a Bitcoin exchange, and a writer for Bitcoin Magazine, the publication that is also organizing the conference. The audience applauds.

BUBBLE-O-METER

10%

It's been a wild week for ApeCoin, the crypto tied to the Yuga Labs-developed Bored Ape Yacht Club NFT collection. (See Debits section.) And it's only Thursday. The latest drama? Twitter suitor Elon Musk changed his profile picture on the social media site Wednesday to a collage of different Bored Ape NFTs. ApeCoin naturally jumped on the news, rising some 19%. But then Musk, in the classic troll form he's come to be known for on Twitter, added "I dunno ... seems kinda fungible." And ApeCoin was soon after on the decline. The gains were still there on the day, though, or at least they were as of 7 p.m. ET when the token was up 10%. 

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Dogecoin's heady returns make investing in crypto look easy. But over 80% of altcoins are 'underwater' within a year, report says by Nicholas Gordon

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(Some of these stories require a subscription to access. Thank you for supporting our journalism.)

IF YOU DON'T KNOW, CRYPTO

Proof of Stake. On today’s agenda, proof of stake, or POS. So, here’s the gist: Remember how proof of work requires “miners” to work through a mess of mathematical computations to add things to the blockchain? (See last week’s newsletter for an explanation.)

Well, POS relies on validators to stake the blockchain’s native token in a smart contract. Then, an algorithm selects validators to make a new block in the network, based on how much of the native token they’ve staked and for how long. And in doing so, POS becomes far more scalable and far less energy intensive than POW, assuaging some of the environmental concerns about crypto. It’s a model that’s become more popular as time has gone one. Ethereum, the world’s second largest blockchain, is currently in the process of transitioning from POW to POS. And POS networks steadily gained market share in 2021, according to crypto data and research company Messari.