Is the SEC Really the Bad Guy?

They say time moves faster in crypto, and I’m not sure anyone feels that more than we journalists. We’re tasked with keeping track of more or less everything that’s going on, and tuning out for even a few days can leave you feeling so behind there’s no hope of catching up.

I’ve been living that relentless reality for months, between untangling the downfall of FTX and launching CoinDesk’s new ”Crypto Crooks” podcast. There wasn’t much “holiday” to my holidays. So I was incredibly grateful to finally take a few days off last week to spend with family and unwind.

It turns out that, as the old saying goes, I picked the wrong week to stop sniffing glue.

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While I was taking a breather, events unfolded that were exceptional even in crypto terms. The continued ascendance of Ordinal inscriptions on Bitcoin has fascinating and potentially major implications, and in a different moment it would be the most important story going.

Instead, the U.S. Securities and Exchange Commission (SEC) has taken center stage with major enforcement actions that many are interpreting as part of a blunt-force effort to marginalize the entire crypto industry. It continued Wednesday morning with news of proposed new rules that would prevent registered investment advisors (RIA) from engaging with many existing crypto custodial services.

After a year in which frauds and charlatans stole or destroyed tens of billions of dollars in investor funds, the SEC has focused much of its crackdown on entities that many crypto veterans would consider “the good guys,” and on services that are far less obviously dangerous than those that ran wild in 2021 and 2022. That reality holds many difficult lessons about the broader pattern of U.S. crypto and financial regulation.

That’s especially true of moves against the U.S.-based exchange Kraken, which paid $30 million in an SEC settlement and agreed to shutter its U.S. staking services. For many, the action feels woefully misplaced: Kraken has been a pillar of the crypto ecosystem for a decade and has been a consistently honest actor.

The particular tool in question may not have been structured ideally – it seems it was more vulnerable to attack as a “security” because it wasn’t a straight fee-based pass-through for stakers. But the core service being provided was fundamentally valid and useful for the ecosystem, and entirely distinct from the “lending platforms” like Celsius Network and Voyager Digital that blew up last year.

The parallel actions against the BUSD stablecoin feel only slightly less misdirected. The SEC reportedly plans to sue Paxos, the issuer of the Binance-branded stablecoin, which the regulator considers an unregistered security. Paxos says it will halt issuance of the token. Binance, the largest offshore crypto exchange, doesn’t have quite the pedigree of Kraken, particularly since it’s a lightly regulated entity. But Binance has been a broadly good actor for half a decade.

More to the point, BUSD may be the victim of some fuzziness around the concept of a “stablecoin.” Both regulators and crypto insiders are likely still traumatized by the incredibly violent collapse last spring of terraUSD, a “stablecoin” built on faulty ideas about algorithmic price stabilization. But BUSD is a backed stablecoin, with dollars in a bank guaranteeing redemptions.

The obvious read here is that there’s some political expediency at play. These actions come after a year in which the SEC failed to spot or prevent massive frauds – a year in which, in fact, SEC Chief Gary Gensler was seen by some as unusually chummy with one of the biggest fraudsters. Cracking down on Kraken and Paxos is hard not to see as, to some degree, making a show of enforcement on targets of convenience. Dissenting SEC Commissioner Hester Pierce is among those who share that general view.

But there’s little point whining about the SEC’s post-facto virtue-signaling – the agency has the power, and seems unlikely to change its stripes any time soon. There’s more alpha in engaging with the realpolitik of its operative logic than in grousing about how unfair it is. That’s especially true because, well, there really was a lot of embarrassing and damaging crypto fraud last year. As Bloomberg’s Matt Levine points out, even the most reasonable counterpoints to misplaced regulation are going to fall on deaf ears once people lose enough money.

It’s hard to dispute that the 2021 bubble led investors, builders and the media to feed retail hype and treat a series of con men-like heroes. The whiff of money, as it always seems to, blunted critical faculties and pumped hopium into the vents.

So while the SEC’s crackdown is likely to put a lot of misplaced burdens on entities that are substantially blameless, the crypto industry as a whole still needs to look inward and reckon with its own responsibility – and ask how it can better marginalize frauds on the front lines the next time mass crypto-mania returns. Clearly, we can’t rely on regulators to get it right for us.