The SEC’s Scattershot Approach Shows Its Weakness

By taking aim at high-profile targets including Coinbase, Justin Sun and Lindsey Lohan, the SEC showed it doesn’t have the resources to effectively police the crypto industry.

AccessTimeIconMar 23, 2023 at 5:26 p.m. UTC
Updated Mar 24, 2023 at 2:59 p.m. UTC
AccessTimeIconMar 23, 2023 at 5:26 p.m. UTCUpdated Mar 24, 2023 at 2:59 p.m. UTC
AccessTimeIconMar 23, 2023 at 5:26 p.m. UTCUpdated Mar 24, 2023 at 2:59 p.m. UTC

It was a triple whammy from the U.S. Securities and Exchange Commission on Wednesday. Coinbase said it received a message saying the SEC essentially intends to sue over violations related to the largest U.S. cryptocurrency exchange’s staking service and possibly token listings. And separately, the SEC filed a lawsuit against one of crypto’s wealthiest and most influential entrepreneurs, Justin Sun, and it took aim at more than half-a-dozen celebrities who promoted TRON-related blockchain projects.

The particulars in Coinbase’s case are still mostly unknown. The exchange was served a “Wells Notice” – the same legal formality the SEC issued to stablecoin company Paxos last month derailing its Binance USD product – that serves as a fire alarm that the securities watchdog intends to bring the heat. The document hasn’t yet been made public, though many are interpreting it as a sign the agency is finally taking action against crypto exchanges simply for being crypto exchanges.

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Just like when the SEC sued Kim Kardashian for failing to disclose she was a paid promoter of EthereumMAX, a project in no way related to Ethereum, the agency today is trying to send a signal. Chair Gary Gensler does not have the resources to go after every celebrity shill or wannabe influencer, so he has to pick his battles. He shoots for the top (the top being someone with millions of Insta followers) and hopes the message trickles down.

In the case of Justin Sun, the megalomaniac crypto billionaire who’s hard not to love, the SEC charged him and his companies, Tron Foundation Limited, BitTorrent Foundation Ltd. and Rainberry Inc., with offering and selling unregistered securities. He was also charged with manipulating markets, including allegations of wash trading TRX to artificially inflate the price of the token as well as directing payments to eight celebrity endorsers to create a false perception of investor interest.

Six of those celebrity endorsers, including “Parent Trap” star Lindsey Lohan, YouTuber Jake Paul and rappers Lil Yachty, Ne-Yo and Akon, have settled with the agency, paying in total more than $400,000 in fines, disgorgement and interest payments. On paper, this is a win for the underfunded agency, which under Gensler has taken the entire crypto industry into its purview. Gensler has stated quite frankly that nearly all cryptocurrencies beyond bitcoin are securities, and that all paid promoters must disclose that they were paid.

But the fact that this stuff keeps happening, and that the SEC has to keep escalating its enforcement actions, only shows how ill-equipped the agency is to rein in crypto. Six celebrities settled but how many remain? How many could the SEC even go after – if they’re even aware of all the bad actors?

The irony here is that by trying to signal strength over the crypto industry, the SEC is essentially showing it has a very weak hand. The Kardashian suit looked bad enough after the collapse of the FTX exchange, which exemplified the poor priorities of the nation’s top securities regulator. And now that eight additional celebs with household names have been sued, it makes it seem like the agency is powerless to stop even low-effort (and frankly, comparatively, low-impact) crimes like failing to say an obvious crypto promotion is indeed a crypto promotion.

If I were a scam artist I wouldn’t feel scared now, I would feel relieved. Maybe emboldened. The SEC has its sights on targets that will garner impressive headlines, rather than the web of scams, “pig butchering” schemes and faulty projects across the crypto industry. And it’s not just the SEC’s fault but other agencies that seem to at random determine what projects to regulate. When enforcements are stochastic, they cannot be a deterrent – because “maybe getting arrested” is just part of the job for a scammer.

The alternative, of course, is providing regulatory clarity. I won’t go into the details here, but you know it, I know it and Gensler knows it. The problem is, especially by threatening Coinbase, Gensler has backed himself into a corner. There are no new rules that need to be written, none of the particularities about how decentralized projects function need to be taken into account, he is suggesting. Crypto itself is bad. That’s a losing prospect for consumers who could benefit from crypto, people the agency is meant to serve – because crypto is too big to tackle and because much of it isn’t bad at all.

How all of this plays out remains to be seen. The U.S. government has essentially declared war on the industry and taken steps designed to debank and ostracize even registered crypto firms. Coinbase is likely going to take the matter to the courts. And if the exchange has grounds to question the SEC’s reasoning, the lawsuit may extend well past the point when Gensler leaves office in two years. But he’s made his mark. Let’s hope he doesn’t embolden actual scammers by muddying the water.

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Daniel Kuhn is a deputy managing editor for Consensus Magazine. He owns minor amounts of BTC and ETH.