2023 Crypto Chronicles: Unveiling the Battle for Regulation
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2023 Crypto Chronicles: Unveiling the Battle for Regulation
2024 will be a turning point for the crypto industry.
Navigating Web3 tides with focused insightsSource: Decrypt
Compiled by: BitpushNews Yanan
For years, U.S. regulators have mostly spoken harshly and unfriendly toward the cryptocurrency industry. In 2023, they finally started taking serious action.
After the collapse of crypto giant FTX in November 2022 due to mismanagement and criminal allegations, the top financial watchdog on Wall Street—the U.S. Securities and Exchange Commission (SEC)—had ample justification to crack down on an industry filled with "scammers, fraudsters, and con artists," as SEC Chair Gary Gensler put it.
But has the crackdown gone too far?
Some U.S. lawmakers, including Republican Majority Whip Tom Emmer, a crypto supporter, have criticized regulators for "stifling innovation in the world's largest economy."
Republican Patrick McHenry accused Gensler of wanting to “kill” the crypto industry. Even courts rebuked the SEC for arbitrarily and capriciously rejecting Grayscale’s application to convert its cryptocurrency fund into an ETF.
Anthony Glukhov, partner at Ramo Law PC, told media: "The SEC's campaign against many crypto exchanges appears to be a deliberate effort to exploit legal ambiguity, advancing political agendas through enforcement—something that may not align well with the commission's stated goal of protecting consumer interests."
But it’s not just the SEC relentlessly pursuing major crypto firms: the Commodity Futures Trading Commission (CFTC) and the U.S. Department of Justice are also actively holding alleged violators in the digital asset space accountable.
Gensler said in 2021 that the crypto industry needed consumer protection. When FTX suddenly collapsed in November and its now-convicted CEO Sam Bankman-Fried was arrested a month later, regulators swiftly intensified their actions.
In January 2023, regulators launched their first wave of enforcement actions against Genesis and Gemini. By late November, Changpeng Zhao (CZ), founder of the world’s largest cryptocurrency exchange, had stepped down as CEO of Binance and pleaded guilty to anti-money laundering violations.
Below is a timeline of this series of regulatory confrontations:
January: The SEC Fires the First Shot of the Year
The SEC moved quickly at the start of the new year, filing charges against crypto lending firm Genesis and crypto exchange Gemini, alleging they raised billions of dollars in digital assets from hundreds of thousands of investors through unregistered securities offerings.
Gemini CEO Tyler Winklevoss responded that the SEC’s action was “entirely counterproductive.”
Genesis, a subsidiary of Digital Currency Group (DCG), filed for bankruptcy later that month, exposing its ties to the defunct crypto hedge fund Three Arrows Capital. It was the provider behind Gemini’s Earn program but froze withdrawals after FTX’s collapse in 2022.
Later that month, stablecoin giant Circle announced it was abandoning plans for a $9 billion SPAC merger—a sign of worsening regulatory conditions for crypto firms. However, a Circle spokesperson told media the company did not blame the failed deal on the SEC and insisted Circle never expected the process to be “quick or easy.”
Toward the end of January, crypto lender Nexo came under scrutiny. One of the last surviving crypto lending platforms following the bankruptcies of Celsius and BlockFi, Nexo settled with the SEC on January 19. Because its lending product was allegedly classified as an unregistered security, Nexo agreed to pay a $45 million fine.
February: Kraken Temporarily Escapes Unscathed
Kraken was next.
On February 9, the SEC charged the major U.S. crypto exchange with violating securities laws by failing to register the issuance and sale of its crypto staking services. Kraken paid a $30 million penalty but neither admitted nor denied the SEC’s allegations.
Months later, in an interview with media, the exchange’s chief legal officer Marco Santori said being targeted by regulators was inevitable when working in crypto. “If the SEC or federal regulators have never come after you, maybe you’re not trying hard enough.” Still, this wasn’t the last time the SEC would knock on Kraken’s door in 2023.
That same month, the SEC issued a Wells Notice to fintech firm Paxos, warning it would take legal action over Paxos’ role in minting the Binance USD (BUSD) stablecoin. The SEC claimed the digital token was a security, which Paxos strongly denied. Subsequently, Paxos halted minting of the token and said it would end its partnership with Binance in preparation for litigation.
March: CFTC Files First Lawsuit Against Binance
The CFTC became the first U.S. regulator to sue Binance, the world’s largest crypto exchange. It filed a complaint in federal court accusing Binance CEO Changpeng Zhao and his company of allowing Americans to trade crypto options since July 2019, violating trading and derivatives rules.
At the time, Zhao used his now-famous number “4” to dismiss the allegations, calling them FUD (fear, uncertainty, doubt).
Throughout the year, Zhao frequently used the number “4,” including when responding to what he viewed as hostile media reports. At the time, newspapers like The Wall Street Journal cited text messages suggesting Binance deliberately evaded U.S. government tracking and regulation.
The CFTC’s move marked a turning point in regulators’ crackdown on the biggest player in the crypto industry. Later, federal prosecutors would bring criminal charges against Binance and its founder.
April: Bittrex Becomes Another Target
In April, the SEC sued crypto exchange Bittrex, accusing it of operating without registering as a broker-dealer, exchange, or clearing agency and earning at least $1.3 billion in illegal revenue between 2017 and 2022.
This action was significant—it marked the first time regulators explicitly singled out well-known assets in the crypto space and labeled them unregistered securities. OMG Network (OMG), Dash (DASH), Monolith (TKN), Naga (NGC), Real Estate Protocol (IHT), and Algorand (ALGO) were all added to the list.
Bittrex said in a statement it had previously asked the SEC to clarify which tokens qualified as securities but received no response. In March, the company shut down its U.S. operations. In August, it agreed to settle—but this was only the beginning of its downfall. By November, the exchange would cease operations globally.
June: The SEC Delivers a Heavy Blow
By summer, crypto regulation heated up. Following the CFTC’s lawsuit against Binance in March, the SEC escalated matters in June by suing two crypto giants—Binance and Coinbase.
Although the factual allegations differed—particularly in that regulators accused Binance of fraud but did not charge Coinbase with the same—the lawsuits were filed in the same week, likely no coincidence.
Another key difference: Zhao was named as a primary defendant in the Binance case; Coinbase CEO Brian Armstrong was mentioned only once in the complaint against his exchange.
In its lawsuit against Coinbase, the SEC alleged the exchange failed to register as a national securities exchange, broker-dealer, or clearing agency and offered and sold unregistered securities through its staking service. The company responded that it had “demonstrated a commitment to compliance” and that the SEC’s “enforcement-only approach” was “undermining U.S. economic competitiveness.”
As in the Bittrex case, the SEC again targeted individual digital assets in its suit against Coinbase—but this time, it named some of the largest cryptocurrencies. Allegedly illegal tokens included Polygon (MATIC), Solana (SOL), Filecoin (FIL), and Cardano (ADA).
The SEC also listed Cosmos Hub (ATOM), The Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS), and COTI (COTI) as unregistered securities in the lawsuit.
In response, the Solana Foundation defended itself, strongly denying the SEC’s classification of Solana as a security. Polygon Labs also issued a statement saying MATIC “can be widely used, but limited to regions outside the U.S.”
The lawsuits caused uproar in the crypto industry, especially the attack on Coinbase. A group of blockchain advocacy organizations sent an open letter claiming regulators were attempting to “usurp Congress’s authority” and urging the presiding judge to dismiss the case.
Wall Street star Cathie Wood said the SEC was “trying to treat Coinbase and Binance as the same, even though they differ significantly in many ways,” and suggested the case against Coinbase was less severe.
Wood had reason for her comments—authorities had long been targeting Binance. The SEC leveled serious accusations in its lawsuit, making one thing clear: Binance was allegedly involved in fraud and commingling of funds.
Most shockingly, the SEC claimed billions of dollars in customer funds flowed into bank accounts controlled by companies owned by Zhao.
Binance and Zhao later settled with the CFTC and faced more serious criminal charges.
July: Celsius and LBRY in the Spotlight, Ripple Gets Brief Relief
Almost all major regulators went after Celsius, the crypto lending firm, in July—one year after its collapse. Its former CEO Alex Mashinsky was arrested and released on a $40 million bail.
The U.S. Department of Justice, SEC, Federal Trade Commission (FTC), and CFTC all filed lawsuits against Mashinsky. In short, according to the complaints, Mashinsky lied about the financial health of his crypto company, repeatedly misled investors, and personally profited. He had previously been arrested but released after agreeing to post a $40 million personal bond. His assets are now frozen, and he awaits trial next year.
LBRY, Inc.—the company behind the namesake blockchain publishing platform—was forced to cease operations after a prolonged battle with the SEC. Regulators objected to the company selling its tokens to fund the project, arguing it violated securities laws.
However, the “crypto regulatory war” wasn’t entirely one-sided. In July, the industry witnessed the SEC suffer its first major setback in its attempt to “regulate by enforcement.”
Ripple, a crypto payments startup whose founders also issued the XRP cryptocurrency—still one of the largest cryptocurrencies by market cap—achieved a landmark victory over the SEC on July 13.
Previously, the SEC had sued Ripple in 2020 for $1.3 billion, alleging the fintech firm misled investors and sold unregistered securities in the form of XRP. But the judge ruled in Ripple’s favor. U.S. District Judge Analisa Torres determined that Ripple’s algorithmic sales of XRP to retail investors (i.e., selling XRP to ordinary crypto users via exchanges) did not constitute securities transactions.
At the same time, the judge ruled that institutional sale agreements worth $728 million did constitute unregistered securities sales, so Ripple wasn’t completely off the hook. Nevertheless, the company and XRP holders worldwide celebrated the win. Major crypto exchanges that had delisted XRP relisted it, and its price surged.
Ripple’s chief legal officer Stu Alderoty said he expected U.S. banks to resume using the fintech firm’s On-Demand Liquidity (ODL) product.
August: Grayscale vs. SEC
A month later, the SEC suffered another courtroom defeat against a crypto firm—an unfamiliar position for the previously dominant regulator.
Grayscale won its long-running battle with the SEC.
The crypto asset management firm had applied to convert its Bitcoin Trust into an exchange-traded fund (ETF), but the SEC rejected the request. Grayscale then sued the SEC in 2022.
At the end of August, the court sided with Grayscale. A judge from the U.S. Court of Appeals for the District of Columbia Circuit overturned the SEC’s decision blocking the ETF. The judge said rejecting Grayscale’s application was “arbitrary and capricious” because the regulator had already approved similar products—crypto futures ETFs.
The crypto market viewed the ruling positively, and Bitcoin’s price rose accordingly. Analysts said the decision could help pave the way for approval of the long-awaited spot Bitcoin ETF.
Meanwhile, Bittrex agreed to pay a $24 million fine to resolve the SEC’s allegations that it sold unregistered securities. Bittrex neither admitted nor denied the charges.
September: Binance Fights Back
In September, Binance and its CEO Changpeng Zhao struck back against the SEC, asking to dismiss the June lawsuit. In short, Binance’s legal team argued the SEC had never provided clear guidance to the crypto industry and therefore exceeded its regulatory authority.
The exchange also argued regulators were trying to “expand their global jurisdiction.” The SEC countered that U.S. customers were still accessing Binance’s global services—even though that was prohibited.
Braden Perry, a former trial attorney at the CFTC, said: “The top Wall Street regulator often believes that if these companies serve U.S. residents or their activities significantly impact the U.S. market, they must comply with U.S. securities laws regardless of where they are located.”
October: Genesis Regulatory Dispute Continues
In October, the New York Attorney General’s Office sued Genesis Global Capital, Gemini Trust, and Digital Currency Group (DCG), accusing the three companies of “defrauding investors and attempting to hide over $1 billion in losses.”
New York Attorney General Letitia James said in a statement that because the three companies allegedly defrauded 232,000 customers involving $1 billion, “middle-class investors suffered losses.”
A DCG spokesperson said they would fight the allegations.
November: Farewell, CZ
Last month, the U.S. government convicted two titans of the crypto industry—FTX founder Sam Bankman-Fried and Binance founder Changpeng Zhao—marking the climax of the crypto regulatory battle.
On November 3, a jury found Bankman-Fried guilty on seven counts of fraud and conspiracy. Although his lawyers vowed to appeal and continue fighting the charges, the verdict effectively closed the chapter on the FTX regulatory saga.
Weeks later, Binance CEO Changpeng Zhao agreed to step down from his role at the crypto firm as part of a settlement with the U.S. Department of Justice, concluding a multi-year investigation. Zhao agreed to pay a $4.3 billion fine and pleaded guilty to money laundering charges.
Around the same time, the SEC launched its second lawsuit against Kraken this year, accusing the San Francisco-based crypto exchange of commingling customer assets with corporate funds—and even using customer accounts to pay certain bills.
Regulators also alleged Kraken sold unregistered securities—a claim the exchange firmly denied—and placed investor funds at risk. Kraken said it would “defend its position.”
December
The past year has been extremely difficult for Changpeng Zhao, former head of Binance. A U.S. judge barred the disgraced crypto tycoon from leaving the country, citing his “substantial wealth abroad” and stating his departure posed an “extreme flight risk.” Zhao’s sentencing will take place next year.
But what happens next? Not everyone believes the crypto industry will continue to face hardship in 2024. Kristin Smith, CEO of the Blockchain Association, said the sector may be shifting toward addressing core regulatory issues.
“The FTX verdict and the DOJ’s resolution of the Binance case should help clear the fog in Washington,” she said.
“2024 will be a turning point for crypto,” she added.
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