After a calamitous 2022 that included the implosion of FTX, enforcement actions by the Securities and Exchange Commission against crypto firms hit a record high in 2023, according to a new report.
Data compiled by the consultancy firm Cornerstone shows a 53% rise compared with 2022, with the 46 total actions nearly twice that of 2021, the year Gary Gensler became SEC chair.
Of the actions, 20 were resolved within the agency as administrative proceedings, such as the case brought against Kim Kardashian, who agreed to settle charges and pay $1.26 million for promoting EMAX tokens on social media without disclosing she received $250,000 for the plug.
Settled penalties against the industry in 2023 totaled $281.4 million, an increase of approximately $40 million from the year before, according to the report. At the end of 2023, the sum of SEC-leveled penalties stood at about $2.89 billion—roughly 0.1% of the industry’s total value.
The lion’s share of allegations continue to relate to fraud and unregistered securities, at 57% and 61% respectively—with many cases overlapping—which underscores the constant tension over how crypto assets are defined from a legal standpoint.
A March 2023 op-ed piece by Gensler quoted in Cornerstone’s report stated: “Enforcement is a tool, not the destination. The goal is to get market participants into compliance with laws and rules and to protect our ‘clients’: U.S. investors.”
The SEC didn’t immediately respond to additional requests for comment from Fortune.
Aftershocks
The 2023 figures point to some of the longer-term effects from the year prior, when in addition to FTX, several crypto firms including BlockFi and Three Arrows Capital collapsed and sent shock waves throughout the industry.
Much of the litigation is ongoing, including SEC cases against both Coinbase and Binance that hinge on how assets traded on the pair of exchanges are legally categorized. Each company is seeking an early dismissal of its case.
“The SEC continues to claim broad authority over all investments while offering no limiting principle to its definition of investment contract,” Coinbase’s chief legal officer Paul Grewal said in a tweet after the hearing.
Today we made arguments in our motion to bounce the @SECgov suit against @Coinbase. After hours and hours, this much remain clear: the SEC continues to claim broad authority over all investments while offering no limiting principle to its definition of investment contract. 1/4
— paulgrewal.eth (@iampaulgrewal) January 17, 2024
In the case of U.S.-based Coinbase, Bloomberg senior litigation analyst Elliott Stein told Fortune he’s predicting a 70% chance that the regulator’s June 2023 lawsuit will be dismissed by the end of the second quarter.
However, with Binance, an offshore exchange, it’s more complicated. In November, it admitted to violating the law by failing to employ adequate anti-money-laundering controls, with founder Changpeng Zhao stepping down as CEO after pleading guilty. Zhao awaits sentencing next month, but could face up to 18 months in prison.
The SEC argued that the settlements showed Binance was aware it was improperly targeting customers in the U.S. In rebuttal, the company argued in a filing that securities laws don’t apply like the Bank Secrecy Act or International Emergency Economic Powers Act—the laws governing the charges that Binance settled.
“Jurisdictional admissions under the BSA do not bring any of the SEC’s claims within the reach of the securities laws,” Binance and Zhao claimed in the filing.
Another notable case was the trial of the failed Terraform Labs, wherein a federal judge sided with the SEC and ruled that four of its crypto tokens—including UST and Luna—constituted unregistered securities. The ruling was a departure from a case against Ripple in which a different judge decided that the exchange’s native tokens, XRP, were not securities—at least in some instances.
Amid the SEC’s recent flurry of litigation, a federal judge in Utah also accused the agency of stepping out of line in its pursuit of crypto firm Digital Licensing Inc. The SEC, according to U.S. District Judge Robert Shelby, apparently made “materially false and misleading representations” in order to freeze millions of dollars in assets belonging to the project. The agency later apologized.
“I fully appreciate the extraordinary responsibility entrusted to the SEC when enforcing federal securities laws,” wrote SEC enforcement chief Gurbir Grewal. “I understand that the division fell short of these standards in this case, and I apologize for that shortfall.”
