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The US Securities and Exchange Commission (SEC) has turned its enforcement authorities against those allegedly responsible for the collapse of the TerraUSD (UST) stablecoin last spring, an event that set off a wave of crypto market contagion during 2022.
On February 16, the SEC disclosed a complaint against Terraform Labs – the creator of UST – and its founder Do Hyeong Kwon, alleging that they engaged in securities fraud. According to the SEC, Terraform and Do Kwon misled investors by promoting the use of UST, an algorithmic stablecoin allegedly designed to maintain a peg to the US dollar.
In May 2022, UST famously lost its peg to the dollar, which Elliptic research found caused investors across the ecosystem to lose $42 billion. The event also caused growing concern among regulators about the impact of crypto market volatility on consumers and the broader financial markets.
According to the SEC, UST ended up being an unregistered security because it was advertised as being an investment. Despite calling UST a stable coin, Terraform and Do Kwon claimed that UST could earn holders up to 20% interest through the returns generated from the Anchor Protocol – a sign the SEC said made UST a high-risk investment.
Moreover, UST holders were able to redeem their tokens for LUNA, a related cryptocurrency that the SEC claims is another unregistered security. The regulator’s allegations come after South Korean prosecutors filed charges against Do Kwon for fraud and other crimes, and as he remains on the run from police as the subject of an Interpol arrest warrant.
The SEC’s charges against Terraform and Do Kwon therefore hardly come as a surprise. However, they come as the crypto industry has expressed growing concern about the nature of the SEC’s stance on enforcement in general, reflecting concerns that the agency’s aggressive stance could reflect an attempt to expand restrictions on crypto activity.
The regulatory announcement about UST came just three days after US custodian Paxos acknowledged that it had received notification from the SEC that the agency was considering enforcement action against Paxos on the basis that the Binance USD (BUSD) stablecoin – for which Paxos acts as the issuer – is also a security.
On February 13, the New York Department of Financial Services (NYDFS) ordered Paxos to suspend the issuance of BUSD coins, which are issued by Paxos on behalf of the Binance exchange. Critics of the SEC suggest that the agency has relied too aggressively on enforcement to threaten industry participants, rather than engaging in the public rulemaking process and issuing guidance.
Since the beginning of the year, the SEC has also announced enforcement action against Genesis and Gemini over their Earn product, and has entered into multi-million dollar settlements with Nex and Kraken over alleged securities violations. Critics say the regulator’s focus on these cases is not only unwarranted given the lack of public rules, but also that they distract from pursuing more serious violations — like those imposed on Do Kwon — and FTX founder and former CEO Sam Bankman-Fried .
This concern was echoed by SEC Commissioner Hester Peirce, who disagreed with many of the recent enforcement actions and called the SEC’s approach “unimaginative.” According to her, the SEC should strive to create a clearer path for crypto industry participants to register their products and services.
On February 15, the SEC also released proposed guidance that would require investment advisers to ensure that qualified custodians handling investor funds provide enhanced safeguards. As a rule, investment advisers should ensure that they only work with custodians, including crypto custodians, who meet extremely high standards for the protection of client funds.
The proposed rules are open for public comment for 60 days, but critics — including Peirce — argue that the comment period is too short for such a broad provision, which could limit the number of custodians who can serve crypto users.
Global financial watchdogs oversee DeFi
The chief financial watchdog is increasingly focused on understanding the risks that decentralized finance (DeFi) could pose to the global economy.
On February 16, the Financial Stability Board (FSB) – a collective of central banks and financial sector supervisors from around the world tasked with identifying emerging risks – released a report on the financial stability risks of DeFi.
According to the FSB, although the way in which DeFi services are delivered is novel due to its technological features, the risks posed by DeFi applications largely mirror those in the traditional financial sector, such as liquidity mismatches, leverage and interconnectedness risks services and platforms.
The report suggests that the risks of instability in the DeFi space spreading beyond the crypto ecosystem are currently minimal, as the points of contact between the traditional financial (TradFi) space and DeFi are limited. However, the FSB suggests that could change if those touchpoints increase over time.
The report recommends that the FSB regularly monitor risks related to DeFi and work to fill data gaps to assess the interconnection of DeFi with TradFi and the real economy. To learn more about the intersection of TradeFi and DeFi, check out our webinar form last year on the topic.
Norway seizes DPRK crypto hacking funds
On February 16, Norwegian financial crime authorities announced a significant asset seizure targeting North Korea’s illegal crypto activity in the DeFi space. According to Økokrim – the Norwegian agency responsible for investigating and prosecuting environmental crimes – it seized 60 million Norwegian kroner ($6 million) as part of its money laundering investigation from the March 2022 hack of the Ronin DeFi bridge that was part of Axie Infinity video game.
As Elliptic’s research revealed at the time, the hack — which was later attributed to the North Korean cybercrime group Lazarus Group — resulted in the theft of approximately $540 worth of cryptoassets. Most of it is laundered through services such as decentralized exchanges (DEX) and the Tornado Cash mixing service on Ethereum, before being sent to centralized crypto exchanges.
The funds seized by Norway in the hack represent only about 1% of total assets, but the action is still important because it demonstrates the ability of law enforcement to identify and seize cryptocurrencies from large cybercrime events. It also boasts US law enforcement’s seizure of about $30 million in additional hacking funds.
News about the Norwegian seizure of funds from Axie Infinity The hack comes as Elliptic identified the emergence of a new Bitcoin mixing service known as Sinbad, which appears to have taken the place of Blender, a mixer used by the Lazarus group to launder Bitcoin from hacking and sanctioned by the US Treasury Department in May of last year. year.
France plans to tighten cryptocurrency compliance requirements
From January 2024, crypto-asset service providers in France could face increased requirements to obtain approval to operate in the country under proposals published by the French parliament.
Proposed upgrades to the current French crypto-registration scheme – administered by the Autorite Marches Financiers (AMF) – would require registration in the future and require that, in addition to meeting AML requirements, cryptoasset service providers must demonstrate strong internal controls, meet enhanced cybersecurity requirements and avoid conflicts of interest .
However, the measures stop short of aligning France’s regulatory framework for cryptocurrencies with the EU’s Markets in Cryptoassets (MiCA) Regulation, which is awaiting final approval by the European Parliament and is not expected to enter into force until mid-to-late 2024.
Canada also wants to tighten crypto rules
Canada is another nation apparently looking to tighten requirements for crypto exchanges following the collapse of the FTX exchange late last year. According to a report by CoinDesk, the Canadian Securities Administrators (CSA) – which is responsible for protecting investors and coordinating activities among securities regulators at the provincial level – intends to strengthen standards for registered crypto exchanges in the country.
Last year, the Ontario Securities Commission (OSC) issued punitive measures against crypto firms that provide unregistered services to Canadian consumers, and the CSA’s plans to strengthen the exchange’s registration framework are designed to place stricter requirements on operators.
Regulation on compliance with the law
