This was quite the year for the crypto industry. From funding shortfalls to the SBF saga playing out in public, the industry and its proponents had a wild year, especially with crypto prices fluctuating more than London’s weather in April.
Still, regulation of crypto and how it is being set up to be enforced was at the forefront of everyone’s minds in the crypto industry. And even though 2024 is going to distract everyone with the presidential elections, many in the crypto industry are hopeful that clearer guidelines will be laid out in the coming months.
Jack Vinijtrongjit, co-founder and CEO of web3 infrastructure company AAG, told TechCrunch+ that “2023 has certainly seen some controversies, although in many ways, it has been a lull from the crypto winter and hangover from the crash of FTX and LUNA in 2022.”
Multiple major scandals rocked the industry in 2022, and consequently, this year, we got front-row seats to the U.S. government’s response. This month alone was intense for the crypto industry: Early in November, FTX’s former CEO Sam Bankman-Fried was found guilty on seven charges of fraud, and then last week, Binance’s CEO Changpeng Zhao stepped down after pleading guilty to a number of charges brought by several U.S. agencies for not cooperating with the country’s laws.
But the rest of the industry “doesn’t need to suffer because of what [Bankman-Fried] has been convicted of,” said Anthony Sabino, professor of law at the Peter J. Tobin College of Business at St. John’s University. The former FTX CEO’s actions shouldn’t hold the industry accountable, Sabino said, but he acknowledged that the series of events that led to FTX’s bankruptcy would result in regulators wanting to rule out the next SBF and deter other bad actors.
“In the long run, catching and punishing bad actors is good for an industry, including blockchain,” said Adam Ettinger, partner at law firm FisherBroyles. “In the short run, nobody wants to go to Thanksgiving dinner and have to explain how their startup is nothing like Celsius or FTX.”
Still, the industry wishes the government and regulators could be clearer about regulation and set down concrete rules.
Mixed messages
“This year, we have heard persistent and pervasive messages from the government, but the messages have been mixed,” Ettinger said. “On one hand, the SEC brought 26 enforcement actions involving digital assets. On the other hand, we have members of Congress that understand the importance of blockchain innovation and are pushing to regulate the technology in a way that won’t stifle our entrepreneurs or send them abroad.”
In 2023, the U.S. Commodity Futures Trading Commission (CFTC) filed 47 actions for misconduct related to “digital asset commodities,” which made up more than 49% of all actions it filed during that period, according to a recent release. Some of its major actions included charging Sam Bankman-Fried and related employees and entities like FTX and Alameda; Binance and its founder Changpeng Zhao; and Celsius and its founder and ex-CEO Alex Mashinsky.
“For years, it seemed like the CFTC as an agency would be the ‘best fit’ to regulate crypto markets,” Ettinger said. “The large number of CFTC actions look like the result of the CFTC catching up to regulate the huge expansion in crypto markets, as well as CFTC increasing their scrutiny for fraud and market manipulation in these markets.”
Separately, the SEC also investigated and litigated charges against “massive crypto frauds” like Terraform Labs and its founder Do Kwon; Richard Heart and three entities he controls: Hex, PulseChain and PulseX; and FTX’s co-founder and former CEO Sam Bankman-Fried, among others. The agency highlighted its focus on fraud, unregistered securities offerings or exchanges and other intermediaries, as well as crypto influencers allegedly and unlawfully touting crypto assets without disclosing their compensation. (TBT to Kim Kardashian’s $1.26 million settlement with the SEC in late 2022.)
The regulation by enforcement method “is a blunt instrument,” Kristin Smith, CEO of Blockchain Association, said. “It doesn’t necessarily provide a pathway forward for innovating in the U.S. It has a chilling effect. But on the flip side, getting regulation via legislation could provide a pathway.”
Although 2023 saw a lot of enforcement, it’s arguably a fair result of the 2022 collapses and chaos the crypto ecosystem saw.
The collapse of major crypto entities like the algorithmic stablecoin Terra and its sister cryptocurrency LUNA created a domino effect that led to a number of major crypto entities like Three Arrows Capital, Celsius and Voyager filing for bankruptcy. Even companies that weren’t related to the Terra/LUNA collapse were affected, and filed for bankruptcy within months as a result of the crypto bear market hurting businesses across the space.
But through 2023, while some tried to pick up the pieces, others kept getting knocked down further as the CFTC and SEC jumped into action.
“It’s still a muddled picture, there’s a lot of uncertainty,” Sabino said. “My humble words to the industry is to tread lightly because you don’t know what will become controlling precedents.”
Some people view the regulatory enforcement actions as the beginning of a chilling effect and believe the enforcement didn’t help the industry. Others applaud these actions, seeing them as moves in the right direction to shake out bad actors in the space.
The industry is begging for regulation, Ben Weiss, the CEO of CoinFlip, said. “There is this perception that regulation can be bad for business, but uncertainty is way worse.”
Ultimately, effective regulation is going to be a good thing for crypto as it becomes increasingly mainstream, especially when it comes to more risk-averse participants, Vinijtrongjit said. “A clear regulatory environment is something a lot of our customers are looking for. The question is whether the SEC’s approach is the optimal one.”
The crypto industry is heading toward “a major courtroom showdown over the future of crypto — not in terms of the market, but who gets to regulate it,” Sabino said.
“Regulation by legislation is preferable to regulation by enforcement,” Weiss said. “I am cautiously optimistic that the U.S. can provide regulatory clarity in a way that protects consumers and encourages innovation. Thankfully, the courts are starting to intervene when regulatory agencies have overstepped, as in the Ripple and Grayscale cases.”
While there’s no question crypto has had its fair share of bad actors, Smith thinks the industry is finally running out of them.
Looking forward
As the year comes to a close, a lot of questions still remain about whether or not there will be concrete crypto-focused guidelines created in the new year. Many are unhopeful, given that the 2024 presidential election and other state and local elections will be happening and the focus will be on other topics like geopolitical tensions, human rights, and the blooming AI industry.
“The 2024 election could have massive implications, because the winners will be able to appoint the heads of regulatory agencies,” Weiss said. “Regardless, the best outcome is if the legislative branch can come up with a clear regulatory framework rather than relying on unelected officials at agencies. Regardless of the political party, I do believe that most regulators and politicians want jobs and innovation to stay in America, and I am encouraged to see staunch defenders of crypto on both sides of the aisle.”
But crypto will not go ignored despite the focus on other topics. “There will be people in congress who will look at this and listen to regulators to help innovators innovate and keep out bad actors. . . . Once we turn over the calendar to 2024, I expect plenty of action,” Sabino said. “Regulatory activity will continue at the same pace, if it doesn’t ramp up.”
“Until the Supreme Court or Congress comprehensively addresses this, we come to the essence of this for uncertain times for the industry and regulators,” he added. “Will crypto survive this? I’m sure it will, but it’s going to be growing pains for the next year or so.”