US Financial Watchdogs Amp Up Crypto Enforcement as Fiscal Year Draws to a Close

As the end of the fiscal year approaches, U.S. financial regulators are intensifying enforcement against crypto projects, filing a flurry of lawsuits in the past 10 days. The SEC and CFTC are accused of regulating through enforcement rather than providing clear guidance, and several cases have raised legal concerns that could set dangerous precedents. One case alleges that market manipulation occurred through an airdrop and rewards program, while another argues that Ethereum nodes in the U.S. give the SEC authority over everything that happens on the network.

U.S. Financial Regulators Intensify Crypto Enforcement as Fiscal Year Nears End

As autumn approaches, U.S. financial regulators are accelerating their pursuit of alleged wrongdoings within the cryptocurrency industry. This surge in enforcement activity, traditionally observed at this time of year, is widely attributed to budgetary considerations and potential quotas that agencies seek to fulfill before the end of the fiscal year on September 30th.

High-Profile Cases Setting Precedents

Notable examples include the SEC and CFTC lawsuit and settlement with EOS in September 2019, involving an initial coin offering (ICO) valued at $4 billion. In December 2020, the SEC announced an ongoing case against Ripple Labs, alleging unlawful token sales amounting to over $1 billion. Additionally, numerous lesser-known crypto projects face legal actions annually for various reasons.

Jake Chervinsky, head of policy at the Blockchain Association, noted on Twitter that the SEC and CFTC's fiscal year concludes on September 30th, providing them with a limited window to secure substantial victories that can bolster their budget requests to Congress. This observation aligns with previous remarks made by Chervinsky.

Recent Litigation Raises Concerns

Within the past ten days, multiple lawsuits have been filed against crypto projects, reflecting the heightened enforcement activity. One lawsuit accuses a company of market manipulation, while another charges a crypto influencer with failing to report income. A third lawsuit even involves a decentralized autonomous organization (DAO).

Critics argue that the SEC's approach of regulating through enforcement, rather than providing clear guidance, has become increasingly prevalent. While the targeted projects in these recent cases may be relatively small, analysts express concerns over the legal ramifications, which could set adverse precedents.

CFTC Lawsuit against bXz Protocol and Ooki DAO

The CFTC filed a lawsuit against the company and founders behind the bXz protocol, alleging the facilitation of unregulated derivatives trading. The founders reached a settlement with the agency, but the CFTC also sued the Ooki DAO, which was spun off to operate the protocol. This move raises concerns that the CFTC may be hindering efforts to decentralize governance of protocols and potentially criminalizing DAO participation.

SEC Charges against Crypto Influencer Ian Balina

In another case, the SEC charged crypto influencer Ian Balina with allegedly failing to disclose income from a 2018 ICO called SPRK. While the specific allegations are less significant, the SEC's reasoning for filing the case has raised eyebrows. The agency asserts that because Ethereum nodes are more concentrated in the United States than in any other country, the SEC should have oversight authority over all network activities.

Adam Cochran, a partner at Cinneamhain Ventures, criticized this overreach on Twitter, emphasizing the unacceptable nature of such a broad interpretation of jurisdiction over the entire cryptocurrency space.

SEC Accuses Hydrogen Technology Corp. of Market Manipulation

The SEC recently accused fintech firm Hydrogen Technology Corp. and its former CEO, Michael Ross Kane, of unlawful market manipulation of "crypto asset securities." Hydrogen allegedly utilized various methods to distribute its HYDRO token, including an airdrop and a bounty program for token promotion.

The complaint alleges that Kane and Hydrogen hired Moonwalkers Trading to use bots to create an illusion of robust market activity. Notably, Hydrogen's market capitalization is below $500,000, and the SEC alleges that Hydrogen "reaped profits of more than $2 million as a result of the defendants' conduct."

While the allegations of unregistered securities offerings and market manipulation are common in the altcoin market, the Hydrogen case raises concerns due to ambiguous language surrounding the airdrop and rewards program.

Carolyn Welshhans, associate director of the SEC's Enforcement Division, stressed that companies cannot evade federal securities laws by structuring unregistered offers and sales as bounties or rewards.

Legal experts have pointed out that the airdrop does not fall within the scope of the SEC's Howey analysis. However, the complaint appears to focus on the promotional scheme. Tyler Ostern, CEO of Moonwalkers, has agreed to repay illicit gains from the bot army.

Chilling Effect on Innovation

While SEC settlements do not establish legal precedent, these enforcement actions nevertheless convey a message and may have a deterrent effect on innovation in the cryptocurrency industry.