The massive growth of cryptocurrencies grabbed the attention of governments, who have been trying for years to sideline crypto trading. Policymakers deem regulations necessary to avoid market outbreaks like the ones we witnessed in 2021 and 2022.
In 2023, the Securities and Exchange Commission in the US (SEC) is leading a strong movement towards regulating decentralised securities to protect traders from fraudulent schemes.
However, crypto enthusiasts oppose this move because it may potentially hinder industrial developments primarily driven by the freedom and shared control of decentralised platforms. Let’s take a look at the SEC’s activities towards cryptocurrencies and what are the predictions.
The Role of The SEC
The US Securities and Exchange Commission is a federal agency created in 1934 tasked with maintaining justice in national financial and securities markets and safeguarding traders from illicit activities in the market. It is the regulatory body of financial institutions and markets, overseeing the trading scenes in the United States and taking preventive actions when misconduct occurs.
Any company or entity that wishes to produce tradable securities, like stocks, cryptocurrencies or bonds, must be submitted and approved by the SEC. The SEC regulations apply to corporations offering financial services and to brokerage and dealing firms.
How Will The SEC Affect The Crypto Market?
Gary Gensler, the Chairman of the SEC, is leading a strong campaign to regulate cryptocurrencies, calling crypto assets securities that must be registered according to the SEC’s regulations.
Earlier this year, Gary Gensler sued exchanges for selling unregulated securities on decentralised exchanges, which has shaken the crypto market. Crypto communities reject these suggestions because they contradict the notion of cryptocurrencies: decentralisation.
However, if some cryptocurrencies become regulated, this will change the scene for cryptos and here is what you can expect.
Regulating New Tokens
The SEC announced in 2017 that every newly produced token is considered a security and must go through the SEC’s regulations. Otherwise, the issuing body will be punished. This decision was the basis for suing Ripple Labs for the illegal selling of XRP in violation of the applicable laws.
The claim was that Ripple Labs Inc. sold its native token without proper registration and closure by the federal government.
Regulatory actions exceeded newly issued tokens and reached using non-fungible tokens (NFTs) and dealing with any unregulated institution.
Thus, BlockFi faced a lawsuit as it was alleged to perform illegal activities entailing cryptocurrency lending and trading without registration and approval by the SEC, and clients were warned of cooperating with any unregulated DeFi platform. Eventually, the company had to pay a total of $100 million and later announced bankruptcy following the FTX platform collapse.
Registering Exchanges as Broker-Dealers
The SEC required all crypto and DeFi exchanges to become legally registered at the SEC to perform business activities legally and avoid preventive procedures by the federal government.
This announcement was backed by the SEC’s obligation to protect US investors from malicious crypto projects and illegal DeFi exchanges.
However, these rules involve strict auditing and closure processing, besides adopting new anti-fraud systems for order books and trade execution to ensure the integrity of financial activities.
These regulations were too much for most exchanges, and most of them relocated outside the US and stopped offering financial services to US citizens. However, some platforms returned to the US and complied with the federal government’s regulations as the best way to capitalise on the lucrative market.
Strict Regulations on Stablecoins
The rise of stablecoins caught the attention of policymakers because these cryptocurrencies require complex and robust fixing systems to ensure their stability. Stablecoins are cryptocurrencies with stable prices and without fluctuations because they are fixed against fiat money like the USD.
Stablecoins are fixed using a pegging system that backs these currencies with cash reserves and other low-risk securities. Following the TerraUSD crash, which was an algorithmic stablecoin, which means its pegging mechanism relied on the activity of another cryptocurrency, the stablecoin market got to the centre of SEC’s attention.
The SEC has started to require these stablecoins to have a strong mechanism backing their values with ongoing auditing and valuation to prevent possible crashes or pegging failure.
Conclusion
Cryptocurrencies face strong movement to be regulated as securities at the SEC. This decision works against the notions of cryptos and decentralised economies, which support shared control and distribution of power.
These actions are driven by the federal government’s task to protect its investors from illegal financial activities and ensure their traders’ best interests. However, if these decisions come through, we might witness major shifts in the crypto world and how decentralisation works.
