SEC Ramps Up Enforcement with Tougher Fines

According to research from analytics firm Solidus Labs, the SEC imposed $150.3 million in fines on crypto companies in 2023. This means that the burden on the cryptocurrency industry has grown more than 30 times compared to the previous year—and this is only for the first three quarters! Prior to this, the SEC had never levied fines exceeding $1 billion since 2019.

But does this reflect a rise in violations? The SEC's September 10, 2024 report shows that while the total amount of fines has surged, the actual number of enforcement cases has decreased. “Fewer violators—higher fines. Higher fines—fewer violators.” This seems to be the approach the SEC is now taking.

What Explains the SEC’s Stance?  

Firstly, it’s linked to the approval of spot Bitcoin and Ethereum ETFs. The integration of digital assets into TradFi has significantly increased the SEC's role as the primary regulator overseeing cryptocurrency operators. 

Secondly, the SEC continues to view digital assets as a major violation of securities laws. According to Mint, SEC Chair Gary Gensler took office with “a rather aggressive regulatory agenda and has taken several significant steps to implement it. He is determined to play it safe and has no intention of compromising.”This is why the SEC’s actions have become increasingly aggressive over time.

SEC Fines Over the Past 11 Years. Source: socialcapitalmarkets

Which Companies Have Been the SEC’s Main Targets?  

1. Terraform Labs. In 2023, after a prolonged legal battle, the SEC found Terraform Labs and its founder, Do Kwon, guilty of misleading investors and engaging in illegal securities trading. The court ordered Terraform Labs to pay a record $5.3 billion in compensation to investors who suffered losses from the collapse of the Terra ecosystem.

Although Terraform's legal team managed to reduce the penalty to $4.6 billion, this amount still equals the total fines levied on the entire industry this year!

The court also mandated that Terraform Labs undergo liquidation, with its assets being distributed among creditors and investors. Do Kwon is jointly responsible for a portion of the debt, though the exact amount is yet to be finalized.

The results of the compensation recovery process are expected after the hearings scheduled for September 19, 2024. Because of this, the case has not yet been included in the total fines for the year.

This ruling will set an important precedent and serve as a strong warning to cryptocurrency issuers.

2. Telegram. In 2019, the SEC fined Telegram $1.24 billion for conducting an ICO for its TON (Telegram Open Network) project.

According to the SEC's lawsuit, Telegram sold around 2.9 billion GRAM tokens to 171 investors worldwide, including 39 U.S. investors. The company planned to launch its own blockchain and facilitate the trading of these tokens in the U.S. market. However, the SEC classified this as an illegal sale of unregistered securities, in violation of the Securities Act of 1933 (!).

As a result of the lawsuit, Telegram paid the $1.24 billion fine, returned a portion of the funds raised during the ICO to investors, and abandoned its plans to launch its own token.

3. Ripple Labs. The long-running legal battle between Ripple and the SEC began in 2020. Ripple was sued by the SEC for selling XRP tokens without proper registration, with the potential fine for the company reaching $2 billion.The core issue in the case was whether XRP should be considered a security under U.S. law. The SEC argued that XRP qualified as a security because Ripple sold it to investors with promises of future profit.

After a prolonged legal fight, on August 8, 2024, the court ruled partially in Ripple's favor. The judge concluded that the direct sale of XRP tokens to retail investors did not violate securities laws. However, the sale of tokens to institutional investors via cryptocurrency exchanges was deemed illegal. As a result, Ripple was fined only $125 million.

This substantial reduction in the penalty (almost 20 times lower!) is seen by some as a significant setback for the SEC in its efforts against the crypto industry. However, the case isn’t over yet, as both sides have the right to appeal.

4. Kraken. In November 2023, the SEC filed a lawsuit against the cryptocurrency exchange Kraken. The regulator classified several cryptocurrencies, including ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL, as unregistered securities. If proven, their sale could be deemed illegal.

The potential fines could total $1.9 billion. 

On September 12, Kraken filed a motion in the California District Court, requesting a public trial with a jury. The final outcome is expected by the end of 2024, though given the lengthy nature of Ripple’s case, this timeline might be optimistic.

As we can see, the crypto industry is facing unprecedented regulatory pressure from SEC Chair Gary Gensler. This approach could have serious consequences for the sector, such as reduced investment and some companies exiting the market.

Many in the crypto industry argue that the real problem isn't the fines themselves, but the regulatory uncertainty that leads to them. It’s no surprise that supporters of both Kamala Harris and Donald Trump are calling for the dismissal of the controversial SEC Chair in the upcoming elections.