SEC Heightens Scrutiny on Crypto Exchanges and DeFi Platforms2-min read

Sanika Bane

Sanika Bane |  Updated on 20/9/2023

In a recent development that indicates tightening regulatory scrutiny globally, the US Securities and Exchange Commission (SEC) is gearing up to escalate its legal actions against several cryptocurrency entities. David Hirsch, the spearhead of the SEC’s Crypto Assets and Cyber Units, underscored that the intensified gaze would be on renowned exchanges such as Coinbase and Binance, alongside decentralized finance (DeFi) platforms.

Addressing the attendees at the Securities Enforcement Forum Central held in Chicago, Hirsch mentioned that the tag of “DeFi” wouldn’t act as a shield against regulatory supervision. However, he acknowledged the challenges stemming from resource constraints in pursuing all tokens perceived to be at odds with the prevailing securities norms.

CoinBharat artwork of an Indian woman at a US hearing

A Glimpse into SEC’s Past Endeavours in DeFi Regulation

Historically, the SEC hasn’t shied away from taking stringent measures against non-compliant entities in the decentralized finance sector. In a noteworthy case, the regulatory body clamped down on two individuals from Florida, Gregory Keough and Derek Acree, along with their venture, Blockchain Credit Partners, for allegedly trading two tokens that weren’t registered as securities. This compelled the firm to cease operations and reimburse a substantial amount totalling $12,849,354 (approximately ₹1,067,32,88,488 and additionally, to pay a fine amounting to $125,000 (around ₹1,03,88,250).

During that period, Daniel Michael, the SEC’s principal in charge of overseeing complex financial products, remarked, “The existing federal securities laws are equally applicable to traditional frauds camouflaged under the veneer of modern technology.” In 2022, the SEC directed most of its enforcement activities towards Initial Coin Offerings (ICOs), an avenue utilised by crypto ventures to raise capital, deemed as unregistered securities offerings by the agency.

Recently, the SEC initiated actions against LBRY, a decentralized platform focussed on content creation and distribution, and Richard Heart, the brain behind the PulseChain ecosystem. The SEC triumphed in its legal battle against LBRY, with the courts declaring its LBC token as an unregistered security.

CoinBharat artwork of an Indian woman at a US hearing

Increased Vigilance: Just the Beginning for Binance and Coinbase

In contrast to the conventional firms that usually prefer settling disputes swiftly with the SEC, cryptocurrency establishments have shown a tendency to opt for litigation, putting a significant strain on the SEC’s resources, as pointed out by Hirsch. Earlier this year, the SEC brought legal proceedings against Binance for alleged regulatory violations and mismanagement of client funds. This was followed by an enforcement action against Coinbase for purportedly operating as an unlicensed broker-dealer.

Hirsch disclosed that the SEC is currently in the process of examining intermediaries in the crypto investment sphere, including brokers, dealers, exchanges, clearing agencies, or other active participants in this sector, to ascertain compliance with the requisite investor disclosure and regulatory stipulations. The aim is to safeguard the interest of investors by ensuring adherence to the established regulatory framework, highlighting the growing concerns surrounding the cryptocurrency sector on a global scale.