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Government Cracks Down on Crypto Industry With Flurry of Actions

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Cryptocurrency executives hoped that 2023 would herald a latest starting after a yr of disastrous setbacks. As an alternative, the industry has found itself on the receiving end of an aggressive government crackdown.

Last month, the Securities and Exchange Commission levied fines and other penalties against crypto lending firms, while federal banking officials issued policy statements that appeared calculated to make it harder for crypto corporations to take part in the mainstream finance system.

In the previous few days, the pace has accelerated. Two high-profile crypto firms — including a preferred exchange where people buy and sell digital coins — got here under intense pressure from state and federal regulators. After announcing a settlement with the exchange, the S.E.C. also fined a crypto promoter and sued a start-up that issued digital coins, for a complete of three enforcements in only over per week.

The actions are likely a prelude to a protracted spell of legal wrangling, as regulators reply to the market turmoil that caused outstanding crypto corporations to file for bankruptcy last yr and value investors billions of dollars. And it signals a growing urgency in Washington to deal with the threat posed by cryptocurrencies, an experimental technology that allows latest forms of monetary speculation.

“I’ve been referring to it because the crypto carpet bombing,” said Kristin Smith, the chief director of the Blockchain Association, a crypto industry trade group. “Every couple hours we hear of some latest enforcement motion.”

For years, regulators were criticized for failing to return to grips with the crypto industry, whilst it grew right into a multitrillion-dollar business. In November, the FTX crypto exchange, once considered one of the crucial reliable firms within the freewheeling industry, failed practically overnight, and its founder, Sam Bankman-Fried, was charged with orchestrating a yearslong fraud.

That put regulators under intense pressure to act. Crypto corporations have long existed in a legal gray area, with legislators and government officials debating how they must be classified for regulation. The industry’s growth has outstripped the slow-moving federal bureaucracies that oversee the opposite parts of the finance industry, like traditional banks and publicly traded corporations.

After FTX filed for bankruptcy in November, the S.E.C., the Justice Department and the Commodity Futures Trading Commission, one other regulator, all brought cases against Mr. Bankman-Fried and two of his top lieutenants.

However the activity against the broader industry picked up last month when the S.E.C. fined the crypto lender Nexo $45 million and charged one in all its competitors, Genesis, with offering unregistered securities.

Last week, the S.E.C. announced a settlement with the Kraken crypto exchange that removed one in all its popular investment products from the U.S. market, which could have broad ramifications for the industry. The agency also sent Paxos, an organization that issues so-called stablecoins pegged to the U.S. dollar, a warning of a possible lawsuit over securities violations.

This week, the S.E.C. sued Terraform Labs, the corporate that developed the digital coins Luna and TerraUSD, which collapsed last spring and triggered a broader meltdown in cryptocurrency prices. On Friday, the agency announced that the previous National Basketball Association star Paul Pierce had agreed to pay $1.4 million to settle charges that he marketed a cryptocurrency without the correct disclosures.

Beyond the S.E.C., three top financial regulators sent a letter to banking organizations last month, warning them to exercise caution of their dealings with cryptocurrencies. Also last month, the Federal Reserve denied an application from Custodia Bank, a crypto company, to affix the central bank’s payment system.

The enforcement wave has caused outrage and anxiety within the crypto industry. Some industry advocates have labeled the federal government efforts “Operation Choke Point 2.0,” alluding to a law enforcement campaign within the 2010s to stop banks from working with certain businesses.

One industry lawyer said he was advising executives to arrange for so long as five years of high-stakes, expensive litigation with the federal government. Crypto corporations have privately traded recommendations on which law firms to rent to handle government lawsuits, said the lawyer, who requested anonymity to explain sensitive legal discussions.

“What’s happening today is a coordinated effort that cuts across multiple agencies and seemingly reflects a unitary view that your complete crypto industry must be restrained,” said Paul Grewal, the chief legal officer of Coinbase, the biggest U.S. crypto exchange. “It’s vital for the crypto industry to arrange itself for a protracted fight.”

Representatives for the S.E.C. and the Federal Deposit Insurance Corporation, a banking regulator, declined to comment. Other federal banking regulators didn’t reply to requests for comment.

Since virtually its inception, the crypto industry has drawn scrutiny from regulators. And in 2021, because the market soared to record heights, some officials in Washington sounded the alarm. Gary Gensler, the chair of the S.E.C., has argued that the overwhelming majority of cryptocurrencies are securities, like shares traded on the stock market, and must be subject to the identical strict regulations. His office spent months constructing cases against crypto firms, a few of which are actually coming to fruition.

At the identical time, the crypto industry cultivated allies in Congress who proposed laws that may have made it easier for the businesses to supply a big selection of experimental products in the US.

Since FTX’s implosion, the tenor of those discussions has modified. In private talks, Capitol Hill staff members who once seemed captivated with working with the crypto industry have expressed skepticism and been more supportive of Mr. Gensler’s enforcement campaign, in accordance with an individual involved within the talks.

The S.E.C.’s $30 million settlement last week with Kraken, one in all the biggest U.S. exchanges, alarmed crypto enthusiasts. Kraken agreed to stop offering a service often called “staking,” which allows investors to earn interest on their crypto savings and has been lucrative for the industry. The enthusiasts fear that the S.E.C. might move to dam other crypto firms from offering similar services.

On Monday, the Recent York Department of Financial Services said it had ordered Paxos to stop issuing BUSD, a preferred stablecoin that’s affiliated with Binance, the world’s largest crypto exchange. That very same day, Paxos said it had received a letter from the S.E.C. warning that the corporate might soon be charged with securities violations over BUSD.

“We’re seeing an arms race between federal agencies within the U.S., competing to point out how tough they may be on crypto,” said Jason Weinstein, a lawyer at Steptoe & Johnson who works on crypto matters. “There are plenty of sheriffs on the town, and every is trying to claim control over the identical town.”

A number of the actions have raised fears that crypto firms may find it harder to develop relationships with the standard finance system. In January, the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued a joint statement that outlined in stark terms the risks of becoming entangled in crypto.

“The administration’s efforts aren’t any secret,” Nic Carter, a crypto investor, wrote in a widely cited blog post last week. He added that “exchanges is perhaps shut off from the banking system entirely.”

As dire predictions have spread, crypto executives have taken to Twitter to attack the S.E.C. Just a few days after Kraken settled with the agency, the corporate’s founder, Jesse Powell, posted an obscene meme about Mr. Gensler. It was later deleted. Kraken didn’t reply to a request for a comment.

“There’s absolute confidence that this current moment is different,” said Mr. Grewal, the Coinbase lawyer. “Our mind-set is that we’re prepared to interact for so long as it takes to get the principles right.”

Matthew Goldstein contributed reporting.

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