The SEC's "Reverse Sweep" in Crypto Enforcement Rolls On

SEC Drops Probe Into Gemini, Cameron Winklevoss Demands Recompense

The U.S. Securities and Exchange Commission (SEC) might be done with Gemini, but Gemini isn’t done with the SEC.

According to a Wednesday X post from Gemini co-founder and President Cameron Winklevoss, the SEC informed Gemini on Monday that it was closing its investigation into the New York-based crypto exchange and would not be filing enforcement charges against it.

But the anti-climactic resolution to the long-running investigation was unsatisfying to Winklevoss, who said in his X post that the SEC’s retreat “does little to make up for the damage this agency has done to us, our industry, and America.” […]

In his post, Winklevoss suggested that any agency that “refuses to write rules before it opens an investigation or brings an enforcement action” should be required to reimburse defendants “for 3x [their] legal costs.”

Winklevoss also called for all SEC staff members involved in the probe into Gemini to be publicly fired, and their “names, roles, and the actions they participated in should be posted on the SEC website.”

SEC, Justin Sun, Tron Ask Court to Pause Fraud Case Over ‘Potential Resolution’

The U.S. Securities and Exchange Commission, the Tron Foundation and Justin Sun filed a joint motion Wednesday asking a federal judge to pause the securities regulator’s ongoing case against the crypto entrepreneur and his company.

The motion is similar to motions filed in the SEC’s ongoing cases against Coinbase and Binance. In both cases, the parties said they were working toward a “potential resolution” of their cases. Coinbase CEO Brian Armstrong said last week that the SEC agreed to drop its case against the exchange outright, pending commissioner approval.

SEC Calls Workers Back to Office Full Time to Comply With End of WFH

The US Securities and Exchange Commission has instructed all staff to return to the office full time starting April 14, according to an agency-wide email reviewed by Bloomberg.

The message follows an executive order mandating in-person work as the Trump administration slashes the size of the federal government and fires thousands of workers.

The SEC directive, sent Wednesday by the agency’s chief operating officer, covers the unionized workforce, with limited exceptions “for the time being.” Those include employees who already have full-time remote arrangements or who have telework locations more than 50 miles from an SEC office.

The Future of Crypto Enforcement in the U.S.

What does this mean for the next four years of enforcement?

First, enforcement is just one component of regulation. We likely will see increased resources dedicated to the other parts of effective regulation — new guidance and rules that offer an achievable regulatory framework. Acting SEC Chairman Mark Uyeda recently announced a new crypto task force for developing a “sensible regulatory path,” and Commissioner Hester Peirce, who will lead the task force, included in her objectives “preserv[ing] industry’s ability to offer products and services.” The dedicated crypto unit also has been reduced in size and repurposed to cyber and emerging technologies, with many staff returning to general enforcement duties.

Second, we could see a renewed focus on fighting fraud. The Commission did not stop bringing crypto fraud cases during the last four years, but many headline cases were non-fraud regulatory disputes. That might change; as Commissioner Peirce said in her objectives speech, “We do not tolerate liars, cheaters, and scammers.”

Third, once there is a new rulebook, we can expect the SEC to enforce those rules. That will take time. We might see a transition period, with some non-fraud cases but more focus on writing the new rulebook. Once adopted, enforcement of that rulebook could come after a fair notice period for the industry to adapt to it.

The U.S. War on Crypto Isn’t Over

But those federal changes won’t end aggressive enforcement actions from state regulators who face public pressure to take action to reign in crypto. Many in the industry have already faced aggressive enforcement from regulators like the New York Department of Financial Services (NYDFS), which recently obtained a $37 million settlement from a crypto lending platform. Regulators like NYDFS were aggressive even when the SEC engaged in aggressive tactics against crypto, so when the SEC scales back its efforts, you can expect them to fill in the void. […]

To be sure, a national regulatory framework and having pro-crypto regulators in Washington will provide more certainty and predictability for the crypto industry. But anyone who believes that “regulation by enforcement” is at an end is naïve. You can still expect aggressive lawsuits and regulator activity in the years to come. The venue may move from the SEC to the states, but the impact on crypto businesses and their customers will remain.

Paving the Path for Crypto Clarity: A Framework for Digital Asset Regulatory Structure Discussion Draft

In creating the framework, we first considered existing classes for traditional assets, and identified how those classes are defined and how their respective assets are grouped. We then applied a similar grouping logic to develop a methodology to define and group digital assets into classes. Specifically, we identified many of the most common types of digital assets, as well as their defining characteristics, remaining mindful that innovation is ongoing. For each digital asset type, we evaluated its particular qualities and the risk/return profile to determine, as a preliminary matter, whether it should be subject to regulatory oversight and, if so, what issues regulations would likely address. We also identified significant categories of market participants and their respective roles, and considered potential risks and concerns related to these roles, particularly in the context of the current market structure.

The framework ultimately recognizes twelve broad digital asset classes and identifies which digital assets fit within each class. The digital asset classes are compared to existing asset classes, entities, and activities to identify potential suitable regulatory authorities. Such classification and assessment provides an overall system to analyze and determine the appropriate legal and regulatory regimes to apply to the market as a whole and to its components.

Related Parties

Readers periodically email me with questions along the lines of: “If Elon Musk keeps doing political stuff that alienates Tesla’s customers and pushes down it sales and market value, is that a violation of his fiduciary duty to shareholders?” I suppose the answer is: I dunno, why don’t you sue him in Texas’s new business courts and find out?

I think that, in general, lawsuits like this — involving not a conflicted transaction but rather a CEO who is making controversial decisions — are hard to win. But I also think that everything is securities fraud, and we talked last year about a lawsuit against Target Corp. alleging that it angered customers by doing a Pride Month marketing event and that that was somehow securities fraud. That struck me as not a very strong case, but a federal judge in Florida let it go ahead, so who knows. I don’t love your chances of winning a lawsuit in Texas claiming that Elon Musk’s far-right provocations are a violation of his fiduciary duties to shareholders, but it would be a little funny to find out.