Is the U.S. Securities and Exchange Commission’s (SEC) ongoing war of attrition against the crypto-assets (virtual currency) industry an effective use of tax dollars? The industry has been calling for regulatory intervention for years.

SEC Chairman Gary Gensler and Gurbir Grewal, head of the SEC’s Division of Enforcement, have consistently maintained that the SEC’s lawsuit is justified.

In his 90-page complaint against San Francisco-based exchange Kraken, Grewal said:

“We believe Kraken made a business decision to obtain hundreds of millions of dollars from investors in exchange for complying with securities laws. This decision represents a conflict of interest that puts investors’ funds at risk. has created a business model that has become widespread.”

The SEC’s mission is to protect American investors by promoting capital formation in a safe and sound manner and by ensuring financial transparency through disclosure. So what do consumers actually think? Should crypto assets be regulated? Is the SEC’s “enforcement regulation” approach useful?

ask citizens

CoinDesk conducted a survey of citizens living in the New York City area to find out their opinions. The answers have been mixed over the past few years, given that crypto news has been dominated by fraud cases, bankruptcy filings, and falling prices.

For example, Emma Sanchez was undecided about crypto assets, but she thought regulation was a good thing, at least in general. On the other hand, Jason D. replied that crypto assets are competition with established financial institutions and that the reason regulators are taking such an aggressive approach towards crypto assets is clearly “jealousy.” .

To be honest, few people knew about the SEC’s lawsuit against Kraken or similar actions taken against Coinbase and Binance before it. Attorney Mark B. said it’s unlikely the SEC would bring a case that it doesn’t think it can win or is justified in pursuing.

Kraken, one of America’s oldest crypto exchanges, misappropriates customer funds, lists unregistered securities, and operates its own market-making and prop desk departments. , is accused of putting customers at risk. At one point, Kraken held more than $33 billion in customer crypto assets, according to the SEC complaint.

Additionally, a 2023 audit firm investigation cited by the SEC found that the company had record-keeping problems and had “material errors” in its financial statements regarding user funds from 2020 to 2021. Due to a “deficiency in internal controls,” the bank account where customer funds were held was sometimes used to pay operating expenses.

“(The charges) seem like a good thing,” Sanchez said after hearing a summary of the charges, which also included allegations that Kraken operated as an unlicensed exchange, broker-dealer and clearing house. .

Is there a legal basis for the lawsuit?

Similar accusations were made against Coinbase, also based in San Francisco, and Binance. Asked whether it made sense for the SEC to bring the same lawsuit against two American companies, Kraken and Coinbase, Sanchez replied, “A crime is a crime.” @Orlando_btc, a lawyer and founder of Web3 compliance solutions company Lexproof, said the move is “using this as a second chance” and a way to drive home the importance of proper registration.

However, in what can be described as circular reasoning, the SEC has stated that since it is listing what was described as “securities” in its own lawsuit against Binance and Coinbase, Kraken is also listing unregistered securities. @Orlando_btc pointed out. He added that this “self-referential claim has no legal force.” This may be an important point given that “the outcome of the lawsuit depends on whether the token is under the jurisdiction of the SEC.”

But was there really a “material risk of loss” to customers, as the SEC claims? Kraken is a small but highly trusted exchange. Founder and former CEO Jesse Powell has long been a proponent of self-custody, repeatedly saying that storing customer assets actually meant risk and responsibility for the company.

In response to this lawsuit, a representative for Kraken stated that the SEC’s lawsuit and critical views on crypto assets as a whole are “legally incorrect, wrong in fact-finding, and catastrophic as a policy.” said it plans to “defend vehemently” in court and that “the law is on our side.”

Determining the appropriateness of regulations

Kraken boasts one of the most sophisticated legal and compliance departments in the crypto industry, consisting of dozens of lawyers led by expert Marco Santori. Kraken ultimately settled with the SEC this year when it was sued over a now-defunct staking program similar to an “investment contract” that paid yield to users who deposited their tokens into a collective pool.

At the time, Powell argued that while staking is not without risk, it is a clear example of how American citizens should be able to decide what to do with their money. Kraken and other centralized exchanges that were forced to end their staking programs offered trading alternatives that were far more difficult for users to do on their own.

In retrospect, the Kraken should not have given up on this fight so quickly. Without a doubt, the Kraken had no merit. Staking is also one of the few use cases where crypto assets make sense for the general public. It’s like a savings account, but with better returns and higher risk.

Tuckahoe’s Alex said that while crypto assets “could be a cool thing,” he wasn’t talking about people using crypto assets for “something useful.” He said he had only heard of “day traders trying to make money in the very short term.” But she doesn’t think agencies like the SEC should necessarily interfere.

“No, I think regulation is pointless. I don’t see the need for regulation. I think it’s like a game,” Alex said.

“Ultimately, I think it comes down to whether or not individuals are being exploited. If they are being exploited, I think it is appropriate to sue or impose restrictions.However, the people who are suing are also playing games. I think that”

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: rafapress/Shutterstock.com
｜Original text: ‘They’re Playing a Game’: What New Yorkers Think of the SEC’s War Against Crypto