How crypto regulations by the SEC affect the market? One of the most significant reasons for the exponential growth of cryptocurrencies over the years apart from its potential and high returns is the lack of clear regulations surrounding it.
However, things are changing pretty fast and soon there will be some strict regulations imposed on crypto transactions, investments and trading.
A few are already in place and more are in the pipeline.
A broad hint regarding this matter is already given by the US Securities and Exchange Commission or the SEC for its increasing intent of enforcing regulations on the crypto space.
Now the million dollar (or million crypto) question is whether or not such regulations will really affect the crypto market and how it will change the scenario.
Well, this article has tried to look into it and analyze the effects of the regulations imposed by the SEC on the crypto market in the best ways possible.
In this article you will come to know about the fate and future of the new crypto coins coming into the market as well as the consequences of these regulations on stablecoin.
This is over and above the effects the SEC regulations may have on the crypto market.
Read on and clear all your doubts before you step into this exciting and rewarding world of cryptocurrencies.
How Crypto Regulations by the SEC Affect the Market?
Ideally, the security laws do not change as quickly and extensively as the trends and technologies in the blockchain industry.
However, after the DAO report in 2017, the US Securities and Exchange Commission made some notable changes.
They stated that they will consider crypto coins, especially those coins that are offered to the public via Initial Coin Offerings or ICOs, just like any investment securities.
They also added that they will ensure that trading of these coins is strictly regulated as it is done for any other security trades by them.
This means that they will consider anyone who is related with the issuing, selling and buying of these crypto coins as violators of investment laws.
Therefore, people who are related with the crypto industry in any way whatsoever should be more careful with their dealings and activities.
Otherwise, they may have to face serious consequences.
You can consider the example of Ripple which is facing deep litigation currently with regards to their native token XRP.
This is because they continued to sell them in the market even after the SEC issued the warning.
Apart from Ripple, there are several companies that have ignored this warning and ended up being fined and paying penalties out of the court to have the scores settled.
Therefore, with such warning from the SEC and their involvement in regulating the crypto space it will surely affect the operation and functioning of the crypto market.
Now, whether it is for the better or worse is a debatable subject and time can only tell about its outcome.
However, the crypto critics and experts believe that the entry of SEC into the space will fundamentally change three things in the years to come. These are:
- All blockchain tokens that are considered as investment securities by the SEC must be registered with them.
- The crypto issuers will also be subject to SEC regulations and enforcement and therefore will have to register them with the SEC as securities trading platforms.
- The stablecoin may also face similar consequences in the event of any regulatory scrutiny because these coins are also known to indulge in securities trades and a few are caught up with misrepresentation of facts regarding their reserves.
Yes, there are several thousands of crypto coins that you can invest in but all are and will be subject to the securities laws.
Fate of the New Tokens
The SEC has not restricted its regulation to the ICOs only.
The new crypto tokens introduced into the space will also face such SEC regulation just as the old ones available in the market as of now.
This includes even those DeFi and non-fungible blockchain tokens.
Yes, it may seem that the new tokens are not liable to follow the existing regulations of the SEC.
This is because these blockchain tokens seem to be able to sidestep these regulations since they function in a decentralized manner where there is no central operator involved in a transaction.
Sometimes these new tokens also characterize something very innocuous such as digital artworks and even in-game objects and fall under the category of Non-Fungible Tokens or NFTs.
However, in spite of these facts and abilities of the new crypto tokens, all of these coins are still subject to the securities laws depending on the extent and form in which these coins are sold as investments.
In fact, on August 6 last year, the SEC announced its enforcement action in the DeFi space for the first time.
They put charges against Money Market, a DeFi platform, for pouring out more than $12 million in illegal profits by the founder of the project and fined it, quite modestly though.
The NFTs will also not be exempted from such regulations by the SEC with respect to securities laws.
An indication regarding this has already been given by Hester Peirce, a commissioner on the SEC which is known to be one of the more crypto-friendly commissioners.
Hester has warned that there are quite a few NFTs that can put investors into trouble based on the securities law.
This is especially applicable when they start trading fractionated shares of such tokens.
He indicated that NFTs can be subject to the securities laws if these are bought as investments irrespective of the form.
It can be marketed as an in-game object, an artwork, or as any collectible, but if it involves any form of investment, it will be treated as securities.
Though the SEC has not yet announced any enforcement actions from their end, it is known that there is at least one NFT operator that has faced litigation from the investors because they believed that they were sold securities that were not registered.
Effects on Crypto Exchanges
As said earlier, the SEC regulations will also have a significant effect on the crypto exchanges.
They will no longer be operating as crypto exchanges but will have to register themselves as a broker or dealer of securities since the commission believes that there are securities exchanged and traded on these platforms no matter what.
Gary Gensler, Chairman of the SEC, said in a hearing in September of 2021 before the Senate Banking Committee that the crypto exchanges will have to register as securities markets according to the law of the SEC unless any of the crypto exchanges qualifies for any exemption.
Therefore, this means that the crypto exchanges will no longer be as opaque in their operation as they used to be historically.
They will no longer be unaccountable before the government or to their clients while allowing operators to generate huge profits.
Based on the new regulations, the crypto exchanges can be held accountable if there are any incidents of front running, wash trading, or freezing the balances of the customers.
Since the crypto exchanges will be registered with the SEC according to the law, they will be compelled to record all trades and transactions.
They will also need to use and adopt better technology systems that will make their order books more audit-compliant.
In addition to that, the crypto exchanges will also have to follow strict rules while executing orders so that any chances of market manipulation are eliminated.
No wonder several crypto exchanges have decided to move outside the United States to avoid such laws and even restrict access to the American customers.
However, there are also several others who have agreed to comply with the SEC requirements because they wanted to make the most out of the lucrative US market.
Effects on Stablecoins
Finally, the effect of these rules and regulations of the SEC on the stablecoin is also worth noting.
It is felt that these coins will face greater regulatory scrutiny.
Since these are special types of blockchain tokens having their value pegged to the dollar or any other fiat currency, these coins usually keep a large reserve of treasuries, cash or any other low risk assets.
There are a few issuers of stablecoin who are however known and even accused of manipulating the market.
They buy crypto coins themselves so that it raises the price of the coins creating a scarcity or shortage in supply.
They usually misrepresent figures and therefore avoid suspicion.
However, such things will not be possible any longer because they will also come under the scrutiny of the regulators.
For example, in October 2021, Tether, which is the largest stablecoin, was fined by the CFTC for $41 million because they misrepresented the nature of their reserves.
Although most of the value was backed apparently by cash, a major portion of their reserve also included unsecured debt, other crypto coins and third-party bank accounts.
Therefore, the stablecoin will also fall under the purview of the SEC because they are de facto securities.
It is quite risky and highly speculative to invest in cryptocurrencies and Initial Coin Offerings or ICOs. You should know how the regulations proposed in this space by the SEC may affect your investment. This article must have helped you in that.