In recent months, the appointment of a U.S. crypto czar along with the introduction of extensive crypto legislation has led many to believe that the era of “regulation by enforcement” in the United States is coming to a close. However, while the leadership at the SEC and CFTC has become more favorable to cryptocurrency, state regulators and Attorneys General are stepping up to fill the enforcement gap.
The Legacy of “Regulation by Enforcement”
For an extended period, the SEC’s aggressive stance towards cryptocurrency has hindered the industry’s growth, prompting calls for a unified regulatory framework to end the so-called “war on crypto.” Consequently, industry stakeholders united to support pro-crypto candidates, hoping to shift the regulatory landscape.
This collective effort yielded results. Donald Trump emerged as the first president openly supportive of the crypto industry, despite his earlier antagonism towards it. Since taking office, he has appointed David Sacks as the inaugural “Crypto Czar,” established a President’s Working Group on Digital Asset Markets, and appointed interim SEC and CFTC Chairs who have already shown encouragement towards cryptocurrency.
State Regulators: A New Threat?
Despite these federal advancements, aggressive actions from state regulators are likely to continue. These state authorities face public pressure to manage cryptocurrency effectively. For example, the New York Department of Financial Services (NYDFS) recently secured a $37 million settlement from a crypto lending platform, demonstrating their willingness to take strong enforcement actions even when the SEC was also pursuing aggressive tactics. As the SEC potentially eases its enforcement, state regulators are expected to intensify their efforts.
A Growing Trend in State Legislation
Other states are not lagging behind. In late 2023, California enacted the Digital Financial Assets Law, empowering its Department of Financial Protection and Innovation to oversee and license digital assets. Illinois is also following suit with the introduction of the Digital Assets and Consumer Protection Act, which would grant the state authority to regulate any business involved in “digital asset business activity” with Illinois residents.
The Role of State Attorneys General
Federal legislation could potentially limit the enforcement powers of state regulators. On February 4, House and Senate Committee Chairs expressed confidence that comprehensive legislation would be enacted within the next 100 days, which could establish a regulatory framework for cryptocurrency and preempt state laws.
However, even if state regulators find their powers curtailed, state Attorneys General would still retain the authority to pursue lawsuits against crypto-related businesses accused of fraud. For instance, in 2023, New York Attorney General Letitia James filed a lawsuit against a crypto trading platform for allegedly misrepresenting itself as an exchange. The platform ultimately settled for $22 million and agreed to cease operations with New Yorkers.
Future Outlook: Expect More Enforcement
While the establishment of a national regulatory framework and the presence of pro-crypto regulators in Washington will bring more clarity and stability to the industry, the notion that “regulation by enforcement” is over is misleading. The reality is that aggressive lawsuits and regulatory actions are likely to persist in the coming years. The focus may shift from federal bodies like the SEC to state regulators, but the impact on cryptocurrency businesses and their customers will continue to be significant.
In conclusion, while the landscape of cryptocurrency regulation may be evolving, the war on crypto is far from over. Stakeholders in the industry must remain vigilant and prepared for ongoing challenges from both state and federal regulators.
