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The cryptocurrency industry navigated a tumultuous 2023, facing legal hurdles and market uncertainties. Despite the market’s growth to $1.7 trillion, it fell short of the projected $3 trillion peak in 2021. As the U.S. Securities and Exchange Commission (SEC) intensified scrutiny, the industry encountered criminal prosecutions, regulatory ambiguities, and legislative sluggishness.
Regulatory Uncertainty Casts a Shadow: The Year of Hesitancy
Blockchain Association director of legal Marisa Coppel highlighted persistent hesitancy in the industry due to regulatory uncertainty. Despite this, the sector achieved significant victories in court, with potential developments for spot-market exchange-traded bitcoin funds in the United States.
Amidst the regulatory haze, businesses faced challenges in building and expanding operations. The Blockchain Association’s Marisa Coppel expressed concerns about the “hesitancy in building because of the regulatory uncertainty.” This hesitancy, she noted, persisted throughout the year, creating a cautious atmosphere within the cryptocurrency sector.
However, even in the face of uncertainty, the industry managed to secure noteworthy wins in the legal arena. The prospect of spot-market exchange-traded bitcoin funds in the U.S. offered a glimmer of hope, potentially providing investors access to significant capital and paving the way for broader acceptance of digital assets.
SEC Targets Major Exchanges
In the U.S., the SEC emerged as a formidable force, targeting major cryptocurrency exchanges in 2023. Binance, Kraken, and Coinbase found themselves in the crosshairs, facing lawsuits alleging the sale of unregistered securities. Marisa Coppel emphasized the SEC’s objective to categorize nearly all tokens as securities using the Howey Test. The striking similarity in complaints across different exchanges underscored the SEC’s unified approach.
The Howey Test, established by a 1946 Supreme Court decision, became a pivotal tool for the SEC to determine whether an asset qualifies as a security. According to the test, an investment contract exists when money is invested in a common enterprise with the expectation of profits derived from the efforts of others. The government’s lawsuits against Binance and Coinbase claimed that cryptocurrencies worth over $37 billion were, in fact, securities.
However, a significant twist occurred in a federal court ruling against Ripple Labs, the promoter of the xrp token. The court concluded that the sale of the cryptocurrency, valued at $33 billion, was only a security when offered to investors and not to retail traders. This marked a notable shift in the court’s approach to agency decisions, challenging the SEC’s broad categorization of tokens as securities.
Despite legal battles, cryptocurrency exchanges like Coinbase sought regulatory clarity through pre-trial proceedings. Coinbase’s attempt to compel the SEC to establish specific regulations for the cryptocurrency sector hinted at a potential turning point. While the SEC initially rejected the request, a court finding in favor of Coinbase opened the door for further arguments, scheduled for January 17.
Legislative Gridlock and Global Legal Landscape
The industry’s hope for legislative solutions faced hurdles in Congress. The market-structure bill, with support from key industry players, advanced to the full chamber but struggled to pass either house. The absence of comprehensive legislation left the cryptocurrency sector grappling with regulatory uncertainties.
In contrast, several other nations, including the UK, with its Financial Markets and Services Act (FMSA), and Europe, with Market Regulations in Crypto Assets (MiCa), enacted substantial laws addressing digital assets. These measures aimed to classify new assets, such as stablecoins, as distinct financial classes, applying conventional banking standards to entities dealing with digital assets.
Locked Up: Criminal Prosecutions Rock the Industry
Criminal court proceedings took center stage in 2023, adding a layer of complexity to the industry’s challenges. Leaders of two major cryptocurrency exchanges, Sam Bankman-Fried of FTX and Changpeng Zhao of Binance faced successful prosecutions by the U.S. government. Charges ranged from securities fraud to market manipulation, involving over 25 crypto-related professionals.
The drama unfolded with FTX founder Sam Bankman-Fried, who faced seven charges, including fraud, embezzlement, and legal conspiracy. After a swift four-hour jury deliberation following a six-week trial, all charges against Bankman-Fried were found guilty. With a potential sentence of up to 110 years in jail, his sentencing hearing was scheduled for March 28.
Binance, the world’s largest cryptocurrency exchange, also found itself under intense scrutiny. The Justice Department’s rebuke, coupled with existing civil accusations from the SEC and the Commodities Futures Trading Commission, led to a $4.3 billion settlement. Changpeng Zhao, widely known as CZ, voluntarily resigned as Binance’s chief executive on November 21. The acknowledgment of breaking sanctions and anti-money-laundering laws added a layer of complexity to the legal saga.
Decentralization, a fundamental concept for many in the digital asset space, faced a threat with criminal prosecutions involving Tornado Cash, a crypto mixer. Accused of money laundering and sanctions breaches, Tornado Cash faced scrutiny one year after the Treasury Department sanctioned the platform for anonymizing public Ethereum transactions. Users, the Blockchain Association, and Coinbase rallied against the allegations, presenting a united front in defense of crypto mixer technologies.
The legal web expanded further as the SEC charged two collections, Impact Theory, and Stoner Cats, for selling non-fungible tokens (NFTs) as securities. While neither company admitted nor denied the allegations, they agreed to pay fines of $6.1 million and $1 million, respectively.
Expectations and Future Developments
As 2023 drew to a close, investors, both large and small, eagerly awaited developments that could shape the industry’s future. The potential approval of a bitcoin spot exchange-traded fund (ETF) became a focal point. Asset managers engaged in meetings with SEC officials, revising applications and considering ticker symbols for funds slated for launch. By January 10th, a decision on twelve new funds was expected. While the SEC permitted ETFs based on bitcoin futures, those linked to the spot price of bitcoin faced consistent rejection, citing susceptibility to manipulation.
In addition to the ETF anticipation, cases against prominent crypto executives, particularly those implicated in the market crash of 2022, were projected to advance on the criminal front in 2024. Former Celsius CEO Alex Mashinsky, charged with securities and commodities fraud, wire fraud, and conspiracy, faced the potential for decades in jail. The trial date was set for September 17, with preliminary hearings commencing in March.
In a separate legal saga, TerraLUNA Labs founder Do Kwon successfully appealed to a court in Montenegro, preventing extradition to the United States or South Korea. However, the possibility of prison time in either nation loomed if extradition to Montenegro was approved. The appeals court remanded the case for retrial. Do Kwon’s connection to the algorithmic token terraUSD, linked to the luna cryptocurrency, raised broader questions about the industry’s accountability and the aftermath of the Crypto Winter triggered by the token’s collapse in May 2022.
According to Sheila Warren of the Crypto Council for Innovation (CCI), the industry’s focus was shifting from “big media moments” to the “nitty gritty” rules and regulations. The high-profile cases and dramas of 2023 were giving way to a more nuanced examination of the regulatory landscape.
Regulatory Frameworks and State Initiatives
As the cryptocurrency industry emerged from a rollercoaster year, the question of a fresh regulatory framework loomed large. Advocacy organizations, including the Blockchain Association and the Crypto Council for Innovation, expressed optimism that legislation would make progress in the new year.
However, the ongoing presidential election, rife with controversy and litigation, threatened to overshadow blockchain-related concerns. Sheila Warren of CCI noted, “Regulation is likely to come from the states,” pointing to proposals under consideration in the legislatures of California and New York.
The industry’s stakeholders, now accustomed to navigating legal challenges, faced a landscape where the push for regulatory clarity would likely take center stage in the coming year. As the cryptocurrency industry sought to mature and establish itself within the broader financial ecosystem, the balancing act between innovation and regulation remained a critical challenge.
2023 proved to be a year of resilience for the cryptocurrency industry, marked by legal battles, regulatory uncertainties, and notable victories. The evolving landscape set the stage for a nuanced examination of the industry’s future, with the hope that regulatory clarity would pave the way for sustainable growth and acceptance. As the industry braced for the challenges of 2024, the tale of cryptocurrency in the legal arena continued to unfold.