SEC Enforcement Under Gary Gensler More than Doubled in 2023

In 2023, the SEC initiated a record 46 enforcement actions against the cryptocurrency sector, and imposed more than $280 million in penalties.

In 2023, the U.S. Securities and Exchange Commission (SEC) notably intensified its regulatory enforcement in the crypto sector, launching a record 46 actions and imposing $281 million in penalties, under the leadership of Chair Gary Gensler. This marked a notable increase in activity, with a particular focus on a range of issues from NFTs to ICOs.

Meanwhile, the SEC delayed its decision on BlackRock's proposed Spot Ethereum ETF, stating that they need more time for further review, with a new deadline set for Aug. 7. The SEC's aggressive stance also continues in its legal confrontations as the regulator is persistent in seeking judicial assistance to compel Ripple Labs to provide financial statements and contracts.

SEC's Record-Breaking Enforcement Spree

In 2023, the United States Securities and Exchange Commission (SEC) hugely intensified its regulatory scrutiny of the cryptocurrency sector, initiating an unprecedented 46 enforcement actions against various crypto firms, according to a recent report from Cornerstone Research. This was the highest annual count since 2013, more than doubling the actions taken in 2021.

The report highlighted that under the leadership of Chair Gary Gensler, confirmed by the U.S. Senate in 2021, the SEC's enforcement efforts in the crypto space have surged, with a 50% increase in 2022 followed by a further 53% rise in 2023.

These enforcement actions, which spanned a range of issues including non fungible tokens (NFTs) and initial coin offerings (ICOs), resulted in the SEC imposing $281 million in monetary penalties through settlements. The regulator also tripled the number of administrative proceedings compared to 2022.

Naturally, this aggressive regulatory attitude has led to quite a number of legal battles, with ongoing cases against major cryptocurrency exchanges and firms like Binance, Coinbase, Terraform Labs, Ripple, and Kraken.

Many critics have voiced concerns over Chair Gensler's approach, labeling it as "regulation by enforcement." They argue that this method completely fails to provide a clear regulatory framework for crypto companies operating in the U.S., creating an environment of uncertainty. Despite these criticisms, the SEC's ramped-up enforcement actions signal a clear message that digital assets are a top priority for the commission.

SEC Delays Decision on BlackRock's Ether ETF

In other SEC news, the regulator has postponed its decision on the approval of BlackRock's proposed Spot Ethereum (ETH) exchange-traded fund (ETF), citing the need for additional time to review the proposed rule changes. This announcement came just one day before the initial deadline set for Jan. 25. Although inconvenient, the delay is part of the SEC's right to extend the review period up to 240 days, with this being the first possible postponement after Nasdaq's filing on behalf of BlackRock for an iShares Ethereum Trust on Dec. 11.

The SEC now has until Aug. 7 to make a final decision on BlackRock's application, but Bloomberg ETF analyst Eric Balchunas anticipates that a decision regarding all of the pending spot Ether ETFs might arrive as early as May, drawing parallels to the SEC's handling of pending Spot Bitcoin ETFs earlier in January. The final decision dates for other applicants, like VanEck, Ark 21Shares, Grayscale Investments, Invesco Galaxy, and Fidelity Investments, are also approaching between May and August.

Despite the delays, SEC Commissioner Hester "Crypto Mom" Peirce has indicated that a court ruling should not be necessary for the approval of spot Ether ETFs. She also expresses her confidence in the SEC's ability to make a fair decision. However, some industry experts, including Morgan Creek and Capital CEO Mark Yusko, still remain skeptical about the likelihood of an approval. They base their prediction on the SEC's historically cautious stance towards the crypto sector.

The SEC is Not Backing Down

Meanwhile, in the ongoing legal battle between Ripple Labs and the SEC, the SEC has sought Judge Sarah Netburn's intervention to compel Ripple to disclose its financial statements for 2022 and 2023, as well as contracts for institutional sales made since the SEC initiated its lawsuit against the company in late 2020. This request was made in a letter to Judge Netburn on Jan. 11, with the goal of strengthening the SEC's enforcement action by scrutinizing Ripple's financials and institutional sales contracts.

The legal dispute centers on the classification of Ripple's XRP sales, with Judge Analisa Torres previously ruling in July of 2023 that Ripple's institutional sales of XRP did not meet the Howey test criteria, thus not categorizing them as securities transactions.

Ripple, however, countered the SEC's demands with a letter on Jan. 19, arguing that the discovery phase ended in August of 2021 and that its activities post-lawsuit filing are irrelevant to the case. Ripple also maintained that its financial condition is inconsequential, as it does not plan to argue against its ability to pay potential penalties.

The SEC rebutted on Jan. 23, emphasizing that Ripple's recent financial disclosures would not impose any undue burden on the company. The SEC highlighted a precedent where a defendant's wealth was considered when determining the magnitude of penalties necessary to deter future misconduct.

The letter also mentioned that Judge Torres had not closed the door on further discovery actions, suggesting that Ripple's financial health and actions post-complaint are pertinent for assessing the likelihood of future violations. The SEC argues that these factors are crucial, especially since the Securities Act of 1933 allows for injunctions to prevent imminent violations, and the size of disgorgement could be influenced by Ripple's fulfillment of orders after the complaint was filed.