Digital Transformation Learning

The ‘crypto winter’ is getting chillier

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By Webb Wright | Junior Reporter

July 27, 2022 | 6 min read

As crypto companies struggle to stay afloat during a historic economic downturn, the US government is cracking down with fines and investigations. The crypto industry may never be the same.

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The crypto market has taken a historic plunge in recent months / Adobe Stock

In the earliest months of 2022, the crypto industry was humming merrily away under sunny skies. Then, suddenly, threatening clouds – driven by the cold winds of inflation – began to blow over in the spring. By early May, temperatures had plunged, along with the values of leading cryptocurrencies such as Bitcoin.

Now, as you may have heard, we’re in the throes of a full-blown ‘crypto winter.’ And things have gotten particularly frigid in recent weeks.

On Monday, Bloomberg reported that Coinbase – one of the world’s largest and most well-known crypto exchange companies – has drawn the gaze of the US Securities and Exchange Commission (SEC). The focus of the SEC probe, according to the report, is to determine whether or not Coinbase has been illegally allowing its US customers to trade unregistered securities in the form of digital assets.

‘Securities’ are tradeable financial instruments – such as stocks, bonds and options – that carry monetary value. The SEC – which, as its name suggests, oversees the exchange of securities on behalf of the US government – uses something called the ‘Howey Test’ to determine whether or not a digital asset is a security. If an asset is linked to an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” then it’s technically deemed a security, and it thus technically should fall under the purview of the SEC.

News of the probe follows hot on the heels of another jab against Coinbase from the SEC last week, in which the agency accused one of the company’s former employees of insider trading. The agency stated last week that it found nine digital assets on Coinbase’s platform that were being traded as unregistered securities, though it stopped short of accusing the company of any crime. On July 21, Coinbase’s chief legal officer Paul Grewal posted a blog post on the company site titled: “Coinbase does not list securities. End of story.”

“Coinbase has a rigorous process to analyze and review each digital asset before making it available on our exchange – a process that the SEC itself has reviewed,” Gruwel wrote. “This process includes an analysis of whether the asset could be considered to be a security, and also considers regulatory compliance and information security aspects of the asset.”

Gruwel also claimed that the US government “doesn’t have a clear or workable regulatory framework for digital asset securities. And instead of crafting tailored rules in an inclusive and transparent way, the SEC is relying on these types of one-off enforcement actions to try to bring all digital assets into its jurisdiction, even those assets that are not securities.”

Coinbase’s shares plunged 21% on Monday following the news of the SEC probe, per Bloomberg.

An industry transformed

The past few months have not been kind to the crypto market, and Coinbase is one of the companies that has been hit particularly hard. The company announced last month that it would lay off more than 1,000 employees. Back in May, the huge and sudden dip in the value of Bitcoin cost Coinbase roughly 20% of its usership.

But Coinbase has by no means been alone – most of the other major crypto companies have been enduring their fair share of hardship lately. Earlier this month, crypto lending company Celsius Network filed for Chapter 11 bankruptcy.

Neither is Coinbase alone in its scrutiny from the feds. The New York Times reported earlier this week that Kraken, another leading crypto exchange company, is being investigated by the Treasury Department’s Office of Foreign Assets Control for allegedly violating US sanctions by extending its services to users in Iran, Syria and Cuba. The US government has reportedly been probing Kraken since 2019 and will likely issue the company a fine. A former executive of the popular NFT marketplace OpenSea was also recently arrested and charged by the US Justice Department for alleged insider trading.

The US government, once so aloof to the goings-on of Cryptoville, is now paying much closer attention and holding crypto companies accountable.

It’s always darkest before the dawn, as they say. Winter could very well soon melt into a temperate and lovely spring. But the crypto industry that emerges from the thaw may look very different from the one we once knew.

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The Drum has launched The Drum Awards for the Metaverse to recognize those leading in this new frontier. These will celebrate the very best creativity, innovation, people and performance for metaverse, web3 and NFT activations, with expert judges from Journey, Meta and R/GA. Entries are open now, with the first deadline closing on November 17.

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