Will The SEC Regulate Cryptocurrencies? What Are The Implications?

Regulating the crypto market has become more necessary amidst the increasing security concerns and the need for robust regulations that ensure the safety of transactions and platforms. 

The SEC is the US authority for trading and financial activities, which has been on a campaign to impose a regulatory framework on cryptocurrencies to control trading virtual currencies. 

Despite strong opposition from crypto communities, there are pros and cons to introducing these rules. Let’s review the SEC’s influence on the crypto market.

Understanding The SEC

The Security and Exchange Commission is the Federal entity in charge of regulating the security trading market, ensuring the well-being of markets and investors and protecting their rights. Since its inception in 1934, the SEC has been in charge of issuing permits and providing full guidelines for domestic financial services. 

Any party involved in buying or selling securities must submit these offerings to the SEC and receive approval by mail or online means of communication. These regulations are applicable to broker-dealers, asset management companies, financial advisors and individual traders.

The SEC’s Influence on Cryptocurrencies

The SEC is aware of the changing dynamics in financial trading, with special attention to the crypto market, which is among the hottest topics this year. The SEC has been leading a campaign to regulate Bitcoin and major cryptocurrencies, which can lead to three possible scenarios.

Influence on Crypto Tokens

The SEC passed a law in 2017 that entails every new token to be registered as a security during the initial coin offering procedures. This means putting the token under the SEC regulations and following Fed-required documentation and protocols.

In 2020, the SEC enforced disciplinary actions against Ripple Labs, the founder entity of the XRP token, for raising billions in capital using unregistered assets, besides other violations regarding legal disclosures and registrations. However, the case was ruled in favour of the XRP team, and later, the SEC dropped its charges against Ripple Labs.

Tightening Regulations for Exchanges

The SEC required crypto exchange platforms to be registered as broker-dealers, making them subject to strict national regulations and detailed procedures. This law was implemented to protect US investors from fraudulent schemes, such as front-running and wash trading.

This caused many exchanges to leave the US market and go offshore to offer crypto investing services. However, after losing a considerable market share, most exchanges returned and obliged to the SEC’s framework.

Overviewing The Stablecoin Regulations

After the Luna crash due to the failed UST stablecoin algorithmic pegging mechanism, the SEC urged stablecoins to include cash assets and low-risk security backing these coins. 

The Commodity Futures Trading Commission (CFTC) imposed a hefty $41 million fine because the USDT (Tether) misrepresented its reserve assets despite being the largest stablecoin.

Conclusion

The SEC has been regulating the trading landscape in the US since the 1930s, including stocks, bonds and other mainstream commodities. However, it has recently changed its emphasis to cryptocurrencies due to the rising security risks and issues surrounding these assets.

Regulating virtual currencies works against the notion of decentralised economies. However, will it be necessary to maintain longevity and maintain fair use cases?