Cryptocurrency is the wild west of finance — it’s like tiptoeing through a minefield. Beyond that obstacle, regulatory bodies – such as the SEC – are ever-shifting their focus, making the challenge even greater. Companies operating in this arena must be constantly engaged and on their feet to be compliant. This article serves to highlight what to expect regarding SEC enforcement strategies with the new administration. It serves as a playbook full of actionable insights for crypto businesses to proactively adapt to the changing landscape. We'll explore expert perspectives and highlight key areas of focus, such as fraud prevention and retail investor protection, providing a real bite of the decentralized world.
Background
The SEC’s filing has created a storm of debate and conjecture regarding the future of cryptocurrency regulation. Substantial focus has been placed on this subject since the emergence of digital assets. The agency’s approach has varied over the years, shaped by the leadership at the top of the agency, various technological advancements, and the state of the broader market. As such, grasping the SEC’s past position and recent turns is key for everyone doing business in the crypto market.
Overview of SEC's Regulatory Approach
Key milestones include:
The DAO Report: The SEC established that tokens issued via The DAO, a decentralized autonomous organization, functioned as securities and were subject to SEC oversight. This marked a significant moment, signaling the SEC's intent to apply existing securities laws to digital assets.
Regulation A+: The SEC permits companies to raise up to $75 million in a compliant token sale with SEC approval. This provides a pathway for crypto projects to raise capital while adhering to regulatory requirements.
Regulation S: The SEC exempts offshore token offerings, provided they do not target U.S. investors. This allows projects to conduct token sales outside the U.S. without SEC oversight, as long as U.S. investors are excluded.
Under prior leadership, the SEC had adopted a far-reaching approach to enforcement. They often used existing securities laws as a justification to punish crypto firms. This approach resulted in confusion and pushback from industry players who lobbied for more explicit regulatory instructions. Over the past few years at least, it seems there is a concerted effort to provide more regulatory clarity while encouraging innovation in the burgeoning crypto space. The establishment of the Crypto Task Force is a big first step to realizing a more sensible free marketplace. President Trump’s executive order doubles down on this shift, pledging to provide greater regulatory predictability.
Importance of Enforcement in Financial Markets
Panelists agreed enforcement should be the backbone of our efforts to protect the integrity and stability of our financial markets. By holding bad actors accountable and deterring misconduct, enforcement actions help to protect investors, prevent fraud, and promote fair competition. Cryptocurrency is a highly dynamic and largely lawless industry that needs decisive enforcement actions. This is important due to the industry’s ability to foster an environment where illegal activities can flourish.
Only a strong enforcement framework will protect investors and help restore trust in the burgeoning crypto market. This makes it an attractive option for institutional investors and promotes wider adoption. Ill-defined or heavy-handed enforcement can curb climate-friendly innovation and push responsible, innovative enterprises out of the U.S. market. Finding the right middle ground between enforcement and regulatory clarity will be key to ensuring that innovation can thrive in a healthy and sustainable crypto ecosystem. The SEC has never been shy about pursuing outright fraud, and crypto is certainly no exception. It is working to help bring all crypto businesses under established securities laws. These requirements range from investor protection to registration and disclosure requirements. The SEC's enforcement efforts are intended to create a level playing field and protect investors from the risks associated with unregistered securities offerings and other violations of securities laws.
Oregon’s Case Against Coinbase
Now, Oregon regulators are engaged in an ongoing legal dispute with the exchange Coinbase. This case exemplifies the difficulties and complexities with state-level cryptocurrency regulation. This case illustrates the risk of conflicting regulations. Third, it highlights the critical need for more transparency and better alignment of goals and priorities between federal officials and state leaders.
Details of the Case
Oregon is pushing hard against Coinbase on several fronts. The state alleges that the crypto exchange has been acting as an unregistered securities dealer. According to Oregon’s regulators, Coinbase’s Earn program enables users to earn rewards on their assets after staking certain cryptocurrencies. They argue that this practice constitutes the offer or sale of unregistered securities. The implication of their argument is that Coinbase is de facto functioning as a broker-dealer by providing this service without registering as one.
Coinbase continues to adamantly maintain that its Earn program does not include the sale of securities. The company further maintains that it has adhered to every applicable law and regulation. Specifically, the company contends that these staking rewards are similar to interest payments and thus should be excluded from the securities classification. This case has the potential to significantly affect Coinbase and other crypto exchanges. It could have dire consequences for the ones that provide equivalent staking programs.
Implications for the Crypto Industry
The Oregon case has opened the floodgates of worry about what this means for increased regulatory scrutiny at the state level. If Oregon is successful, it may encourage other states to take similar action against crypto exchanges. That could lead to a confusing patchwork of contradictory rules around the country. This would lead to major compliance costs and operational hurdles for crypto companies and potentially chill innovation in this burgeoning industry.
This case highlights the greater need for an overt and more specific definition. We need to have uniformity in what counts as a security under the cryptocurrency umbrella. Federal regulators have failed to deliver unambiguous direction. Consequently, each individual state must interpret and apply current securities law to these novel digital assets, resulting in uncertainty and confusion. If a clear and consistent regulatory framework exists, it can promote responsible innovation while ensuring that our crypto ecosystem remains robust and secure. It is unclear, but the Oregon case will likely determine the course of future crypto regulations. Its outcome will shape state and federal policies for years to come.
Lack of Federal Legislation
One of the most significant challenges to the crypto industry is the absence of clear, comprehensive federal legislation. The SEC and CFTC, along with other agencies, have been asserting regulatory jurisdiction over various segments of the crypto market. Yet, one law that provides a detailed framework for all things digital assets across the board is not yet available.
Current Gaps in Regulation
This absence of comprehensive federal legislation has created huge holes in the regulation. This makes for a very unclear and chaotic situation for companies, as well as investors. Key areas that lack clear regulatory guidance include:
Classification of Digital Assets: Determining whether a particular digital asset is a security, a commodity, or something else entirely remains a contentious issue. The lack of a clear definition makes it difficult for businesses to comply with existing securities and commodities laws.
Regulation of Crypto Exchanges: Crypto exchanges operate in a gray area, with limited regulatory oversight. This raises concerns about investor protection, market manipulation, and illicit activities.
Stablecoins: Stablecoins, which are designed to maintain a stable value relative to a traditional currency or asset, have become increasingly popular. However, they are subject to limited regulatory oversight, raising concerns about their stability and the potential for systemic risk.
Decentralized Finance (DeFi): DeFi platforms, which operate without intermediaries, pose unique regulatory challenges. It is unclear how existing laws and regulations apply to these platforms, and there is a risk that they could be used for illicit activities.
Potential Impact on Market Stability
The absence of such federal legislation would have a materially adverse effect on the stability of the market. The lack of regulatory guardrails adds to the confusion and fear of the unknown and pushes away institutions from investing. It further opens the door to fraud, market manipulation, and other criminal and unlawful trading activity. That’s why we require a thoughtful, comprehensive federal regulatory framework. This will ensure regulatory clarity and investor protection, while providing for a healthy and sustainable crypto market.
Without some basic rules of the road, the crypto market is ripe for shock and turmoil. Such an event at one of the larger stablecoins would likely initiate a domino effect of failures. Similarly, the failure of one of the big crypto exchanges would threaten the whole financial system. It is time for federal legislation to mitigate these risks for the benefit of investors, platforms, and the overall stability of the crypto market. Establishing a clear, consistent, and comprehensive regulatory framework will go a long way to restoring investor trust in the crypto market. Institutional investors will be gravitating towards this trust, leading to higher stability and liquidity.
Organizational and Staffing Shakeups
Changes in leadership and staffing within regulatory agencies like the SEC can have a significant impact on enforcement priorities and strategies. The appointment of new commissioners, the departure of key staff members, and the reorganization of internal divisions can all lead to shifts in the regulatory landscape.
Changes within the SEC
The SEC recently has made a number of organizational and staffing changes which may affect its approach. The symbolic, pending confirmation of Paul Atkins as SEC Chair will be the watershed moment – for better and for worse – on the regulatory frontier. If confirmed, Atkins’ leadership would likely strengthen the current trend that’s already moving us away from enforcement crackdowns and towards more rule-based guidance. Furthermore, the SEC created its own Crypto Task Force on January 21, 2025, led by Commissioner Hester Pierce, to address digital asset policies and pursue greater regulatory clarity.
If so, these changes mark a significant departure from some of the code enforcement by former leadership. Now, the pendulum is swinging in the other direction, toward a middle ground that favors clarity of regulation and fosters innovation. The SEC is clearly eager to hear from industry participants as well. By working towards clear regulatory guidelines, they can provide the market with a more predictable and sustainable crypto ecosystem.
Effects on Regulatory Enforcement
The organizational and staffing shakeups at the SEC will likely affect regulatory enforcement on multiple levels, including the importance of a diverse or inclusive home culture. Moving to rule-based guidance could lead to a significant drop in enforcement actions. Concurrently, we might expect to see more interpretive guidance and no-action letters being promulgated. This would go a long way towards providing more transparency to the crypto industry and allowing firms to abide by current laws and regulations properly.
The SEC will continue to be vigilant in enforcing our securities laws. Specifically, they are using all their firepower to keep a laser focus on the fast-moving crypto space. The agency’s full force against fraud and market manipulation, among other illegal conduct, should be paramount. It should not flinch from criminal action against the companies that commit such acts. Lastly, the SEC’s enforcement efforts should be seen as a positive step toward protecting investors and ensuring the long-term integrity of the crypto market. The leadership changes at the SEC reflect the agency’s recognition that a more detailed and nuanced approach to enforcement is in order. Instead, they focus more on providing assistance and fostering adherence.
Formal Order Review Process
The SEC’s formal order review process is a mechanism for reviewing and rescinding or revising existing, often outdated, enforcement orders. This procedural safeguard helps make sure that enforcement actions are free from whim and caprice. Further, it dovetails perfectly with the agency’s greater regulatory goals.
Overview of the Process
The formal order review process typically involves a thorough examination of the facts and circumstances underlying the enforcement order, as well as a review of the applicable laws and regulations. Additionally, the SEC should take into account industry participants’ and other stakeholders’ recommendations on best practices. The merit-based review process results in one of three potential outcomes. It has authority to change, repeal or uphold the initial enforcement order.
The SEC has indicated its intent to initiate a formal order review process. This decision marks EPA’s important commitment to ensuring that enforcement actions are reasonable, thoughtful, and consistent with its regulatory authority. This process provides an opportunity for the agency to correct errors, address unintended consequences, and adapt its enforcement approach to changing market conditions.
Key Areas of Focus (FCPA, Crypto, AI, Private Funds)
As part of its formal order review process, the SEC is likely to focus on several key areas, including:
Foreign Corrupt Practices Act (FCPA): The SEC has been actively enforcing the FCPA, which prohibits U.S. companies from bribing foreign officials to obtain or retain business. The agency is likely to review its enforcement approach to ensure that it is effective in deterring corruption and promoting ethical business practices.
Crypto: The SEC is likely to review its enforcement actions in the crypto space to ensure that they are consistent with its overall regulatory objectives and that they are not stifling innovation. The agency may also consider providing additional guidance to crypto businesses on how to comply with existing securities laws.
Artificial Intelligence (AI): The SEC is likely to examine the use of AI in the financial industry and consider whether additional regulations are needed to address the risks associated with this technology. The agency may also review its enforcement actions involving AI to ensure that they are appropriate and effective.
Private Funds: The SEC has been increasing its scrutiny of private funds, including hedge funds and private equity funds. The agency is likely to review its enforcement actions in this area to ensure that they are protecting investors and preventing fraud.
The SEC's formal order review process is an important mechanism for ensuring that its enforcement actions are fair, consistent, and aligned with its regulatory objectives. This process would inject a much-needed routine into the agency’s efforts to recalibrate its enforcement focus to evolving market dynamics and to preemptively respond to new risks.
Going Forward
Overall, it is very much uncertain, but many trends and developments indicate possible directions forward. The SEC's evolving approach, the lack of comprehensive federal legislation, and the ongoing organizational and staffing changes will all shape the regulatory landscape in the years to come.
Predictions for Future Regulation
Based on recent developments, several predictions can be made about the future of crypto regulation:
Increased Regulatory Clarity: The SEC is likely to continue its efforts to provide greater regulatory clarity to the crypto industry. This could involve the issuance of additional guidance, the development of new regulations, or the clarification of existing laws and regulations.
Greater International Coordination: Crypto regulation is likely to become increasingly coordinated at the international level. This could involve the development of common regulatory standards, the sharing of information, and the joint enforcement of regulations.
Focus on Investor Protection: Investor protection will remain a key priority for regulators. This could involve stricter rules for crypto exchanges, greater transparency in token offerings, and increased enforcement actions against fraudulent schemes.
Regulation of Stablecoins: Stablecoins are likely to be subject to increased regulatory scrutiny. This could involve requirements for stablecoin issuers to hold reserves, to undergo audits, and to comply with anti-money laundering regulations.
Regulation of DeFi: DeFi platforms are likely to face increasing regulatory pressure. This could involve the application of existing securities and commodities laws to DeFi platforms, the development of new regulations specifically tailored to DeFi, or the imposition of stricter enforcement actions against DeFi platforms that violate existing laws.
Strategies for Compliance in the Crypto Space
Due to the rapid pace of regulatory changes unfolding today, crypto businesses must take a forward-thinking approach with compliance baked in from the start. Some key strategies include:
- Stay Informed: Keep abreast of the latest regulatory developments and guidance from the SEC and other agencies.
- Seek Legal Counsel: Consult with experienced legal counsel to ensure that your business is compliant with all applicable laws and regulations.
- Implement Robust Compliance Programs: Develop and implement comprehensive compliance programs that address key regulatory risks, such as anti-money laundering, securities law compliance, and data privacy.
- Engage with Regulators: Engage with regulators to understand their priorities and to provide input on proposed regulations.
- Monitor Transactions: Monitor transactions for suspicious activity and report any potential violations to the appropriate authorities.
- Conduct Regular Audits: Conduct regular audits to ensure that your compliance programs are effective and up-to-date.
By implementing these strategies, crypto businesses can better position themselves to adapt to the rapidly changing regulatory environment and reduce their likelihood of facing enforcement actions. Taking a proactive approach to compliance fosters an organization-wide culture of trust that regulators, investors and customers can depend on. This simple strategy helps nurture a responsible and sustainable crypto ecosystem.
