It’s no secret that Crypto has had a rough few months. With the general market turmoil, mass position liquidations, and the stability of reserves for most major exchanges coming into question, its fair to say that many have struggled recently. To top off the obvious downward feeling, the inevitable ‘nay sayers’ of crypto have arisen once more from hiding, with the sole aim of reminding us all that crypto is ‘dead’.
Outside of the obvious negative market conditions, the resurgence of crypto ‘nay sayers’, and the ever so typical immigration of ‘crypto experts’ moving away from the industry, like birds who head south every winter, this time around there is something very different having an impact. Lawsuits and regulation.
Anybody would have to been in hiding for the past few months to not have noticed the alarming number of companies failing. Celsius, Three Arrows, Blockfi, and FTX are just a few names which have hit the news for the same reason. They all failed and took an alarming amount of peoples funds with them.
However, within the dust and turmoil of these companies collapsing into the ground all of these companies have one thing in common. They have been dragged or are being dragged, over the coals by regulators and lawsuits in the United States.
To most that may seem like an obvious conclusion. Break the law, face the consequences. But for those paying attention, it signifies a much bigger more alarming issue, what is going on in the United States and should any crypto company should be operating there?
The United States – Cash grab?
The United States has a history of not embracing new social change when it comes to regulations. A screaming example of this is: marijuana. This isn’t even a hot topic in most of the USA but from a regulatory and enforcement prospective, its a nightmare. With State and Federal rules all different from each other. We all know other examples exist, with bigger personal issues, but political debate is parked for now.
Since the start of Initial Coin Offerings the United States set itself apart from the rest of the world. Where as other countries either outright banned such activities, like China and Russia, or didn’t have any feeling on the subject, like many off shore locations the USA developed, what many called, a honey trap. The USA refused to give any guidance on if ICO’s were ok or a breach of rules. Maybe you were ok, maybe you weren’t. The worst part about this part of the story, is that things haven’t changed.
The reality is that US Regulators arbitrarily enforce rules from older standards. There is little to no case law on this matter and they deliberately seem to pick on companies which do not have the financial resources to defend themselves. For example, most regulator enforcement actions would probably cost the average company millions to defend.
There is no attempt nor has there been any serious attempt to work with crypto companies to develop an actual usable framework. The ever bankrupt country, seemingly more interested in issuing fines to larger firms in the space, then protecting users. (For those of you who don’t believe that, research how much the US Federal government recovered through the FBI, DOJ and SEC actions, then look at how much was paid to ‘victims’ in restitution)
The legal framework – a dice roll.
The United States has a complex legal framework. For those of you unfamiliar there are State and Federal laws that come into play. There is also then constitutional rights which say where the Federal government has made no laws on a subject, the states laws become the governing law. To date, there is no Federal Statute or Code which features the word ‘Cryptocurrency’. This means the US Federal government relies on a case from 1946 to determine what is a security and what isn’t. 1946. That’s the year after WW2 ended, for those of you who need context.
The SEC and CFTC have both taken a tough yet random stance on enforcement in the crypto space, and companies that do not comply with regulations can face significant fines and penalties. This can create a high level of risk for crypto companies operating in the United States.
One notable example is the case against Telegram, which the SEC brought in 2020. The SEC alleged that Telegram had conducted an unregistered securities offering when it sold $1.7 billion worth of its own cryptocurrency, Grams, to investors. Telegram argued that Grams were not securities and that the offering was not subject to SEC registration requirements. However, the SEC disagreed and obtained a preliminary injunction to stop the distribution of Grams to investors. Telegram ultimately decided to return the funds to investors and abandon the project.
Another example is the case against Ripple Labs, the company behind the cryptocurrency XRP, in December 2020. The SEC brought a lawsuit against Ripple, alleging that the company had conducted an unregistered securities offering when it sold XRP to investors. The SEC argued that XRP is a security and that Ripple had sold it to investors without registering it with the SEC. The case is still ongoing.
Most recently, even the Winklevoss twins seem to have come under attack from regulators through their company which traded crypto back in 2018/2019. The randomness of enforcement and the seemingly impressive way the regulators can twist facts to suit the needs of the legislation, is a massively worrying stand point for many who are simply trying to operate a legitimate business within a free market.
The SEC also brought charges against several individuals and companies for alleged fraud, such as the case against Centra Tech, in which the SEC charged the founders with fraudulently marketing a cryptocurrency-related investment product. All of which, people have very mixed emotions about when the projects are looked at in depth.
It’s worth noting that the regulatory environment is constantly changing however that change seems to never make sense when it comes to crypto. The random nature of enforcement actions and the seeming willingness to ignore a number of scams and attack the legitimate projects, leaves many wondering what the purpose of these actions are. Especially when other countries have workable frameworks and laws to work with companies operating in this space.
Outside the securities framework
Outside of the securities framework the United States has a seemingly endless arsenal of tools that litigators can use to drag companies into the jurisdiction of the North American country.
Alter Ego rules is the concept that a company is really a US Company if it is just mascaraing as a foreign firm. That’s right, during a lawsuit anyone can claim that a company based in the British Virgin Islands, Seychelles or anywhere is really a United States company for any number of reasons, the most of which is if the company has a footprint, operations, or decisions are made within the United States.
Technically this means that even if a director, or subsidiary is based within the United States, someone can claim that the whole company is a US Company and so should fall under the jurisdiction of the courts. A huge worry for those who are simply trying to conduct business away from the US. Moreover, for those who know the US Court system, it would take six months and an endless supply of finances to prove you were not an alter ego company.
What does all of this mean?
Many people believed for a time that the US was just being slow in its management of Crypto and Digital Assets generally. However, given the time lawmakers have had to act, and the actions taken by regulators on a random basis, the consensus has now switched to a belief that the US is operating more deliberately in its methods, selecting the companies it targets at will.
When we stack this approach up against countries like the UK, or even the UAE who are developing actual frameworks for not just crypto, but other types of digital asset companies, we have to now begin to accept the belief that the United States should be abandoned by all crypto companies, until they finally develop a workable framework and deploy actual balanced enforcement measures.
Although it is easy to say that everyone ‘needs’ the United States, many companies find that not to be the case. Actually, millions of companies over the globe operate without any action or footprint within the USA on a daily basis. The USA only accounts for less than 5% of the worlds population, and although it boasts the worlds largest economy, in a 2023 age, many are starting to doubt the numbers produced by the US authorities, especially in light of the change of administration at the last election. The reality is for crypto companies, that the disadvantages and the risks, now outweigh the advantages.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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