Nearly Half of SEC Crypto Enforcement Actions in 2022 Were Against ICOs

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The U.S. Securities and Exchange Commission (SEC) launched a record number of crypto-related enforcement actions last year, up 50% from 2021, according to a report by the advisory firm Cornerstone Research.

The report found that during 2022, the SEC filed a total of 24 lawsuits in US federal courts and six administrative proceedings. The number of disputes increased compared to the 14 cases recorded the previous year.

San Francisco-based Cornerstone Research is a litigation advisory firm that provides financial analysis and expert testimony to attorneys, corporations and government agencies. The Companies Database contains cryptocurrency-related enforcement actions filed by the SEC between January 1, 2013 and December 31, 2022.

Of the 30 total enforcement actions, 14 involved initial coin offerings (ICOs), with 57% of those actions including an allegation of fraud.

Allegations in SEC Cryptocurrency Enforcement Actions 20132022. Source: SEC, Cornerstone Research

In addition, the SEC has brought its first-ever case of insider trading and alleged market manipulation arising from the buying and selling of digital assets, it is the case of Nikhil Wahi, brother of the former Coinbase product manager Ishan Wahi.

Last week, Nikhil Wahi was sentenced to 10 months in prison for his role in a crypto insider trading scheme.

Other high-profile cases brought by the Commission included charges against BlockFi for allegedly failing to record bids and sales on its retail crypto lending product in February 2022, as well as formal charges against the founder and former FTX CEO Sam Bankman-Fried, who was accused of defrauding investors in December.

Under Gensler’s chairmanship, the SEC has increased its focus on cryptocurrency lending and trading platforms and decentralized finance (DeFi) platforms, said Simona Mola, director of Cornerstone Research, which authored the report.

Mola also quoted SEC Chairman Gary Gensler as saying the trail is getting shorter for crypto companies to register with the agency to stay compliant.

According to the researcher, this could lead to more enforcement action from the SEC Crypto Assets and Cyber ​​Unit, which recently expanded its staff to investigate securities law violations in crypto markets. .

The SEC hunts down unregistered securities

Digging deeper into the report, 22 enforcement actions the SEC filed last year, or a total of 73%, alleged violations of unregistered security offerings under Sections 5(a) and 5(c). securities law, with 15 (50%) containing both allegations.

Four actions saw the SEC allege failures to register as a broker or dealer under Section 15 of the Exchange Act, against one company and seven individuals.

In two separate actions, the SEC has charged billionaire socialite Kim Kardashian for her role in promoting the Ethereum Max (EMAX) token, which the SEC has called a security of crypto assets.” The Commission also charged crypto promoter Ian Balina for his offering and selling SPRK tokens from Sparkster in July 2018.

Kardashian and Balina have been accused of not disclosing that they received compensation for their promotion of the projects.

Cumulative number of SEC cryptocurrency enforcement actions during the Gensler administration (April 2021 December 2022). Source: SEC, Cornerstone Research.

Gensler argued that from the agencies’ perspective, the majority of cryptocurrencies, particularly assets native to proof-of-stake (PoS) blockchains, which allow holders to passively earn returns through staking, are likely securities (and should be registered with the SEC).

According to the Cornerstone report, of the 127 crypto-related enforcement actions from 2013 to 2022, up to 73% of cases alleged breaches of unregistered security offerings, with 70 (55%) involving ICOs.

During the same period, the SEC imposed approximately $2.61 billion in total monetary penalties, including $242 million in settlements reached by the agency in 2022.

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