The U.S. Crypto Crackdown Could Reshape the Industry

The U.S. crypto community has long regarded Gary Gensler as one of its foremost enemies. Over the last few years, the Securities and Exchange Commission (SEC) chair has talked often about the dangers of cryptocurrencies and the need to strongly regulate the industry.

And since the FTX crash in November, Gensler has only stepped up his aggression against crypto. While Congress has made little headway on passing a regulatory framework for crypto, Gensler has used his own powers to crack down on the industry. Over the past couple months, the SEC has charged several major crypto companies with violating securities laws.

Many crypto insiders are now complaining Gensler’s actions are stifling innovation and driving crypto businesses overseas. Others, however, argue that Gensler’s approach will weed out bad actors and help legitimize a heavily stigmatized and risk-embracing industry. Regardless of what happens next, Gensler’s actions represent a key inflection point for crypto.

“It certainly feels like a crypto carpet-bombing moment,” Kristin Smith, the CEO of the Blockchain Association, a crypto lobbying group, says. “As the lawyers are analyzing this space, they’re thinking really hard about whether or not the U.S. is the appropriate place to base some of these crypto activities.”

Federal offensive

At the heart of this battle is the debate over whether cryptocurrencies should be considered securities or commodities. Securities are regulated by Gensler’s SEC, which has a reputation for tougher regulation than the Commodities Futures Trading Commission (CFTC), the commodities watchdog. Many crypto leaders, including FTX’s Sam Bankman-Fried when he still held power, argued that most cryptocurrencies are commodities, and pushed adamantly for the CFTC to preside over their industry.

Read More: Crypto Goes to Washington

Gensler, on the other hand, views most crypto products as securities. Since January, he has used this framework to charge several major crypto companies, including Gemini, Genesis and Kraken, with failing to register financial products with the SEC. Those three companies offered yield programs, in which investors earned interest on the money they deposited. While the companies gave the products different names from each other, Gensler argues that they all were similar mechanisms that should be under his SEC purview.

Gensler sent out a warning to all similar programs. “This really should put everyone on notice in this marketplace,” he said on CNBC. “Whether you call it lend, earn, yield, APY, that doesn’t matter… They should seek to come into compliance.”

Genesis imploded following the FTX crash, and still owes $900 million to investors who put their money in Gemini Earn. Tyler Winklevoss, co-founder of Gemini, tweeted that the SEC’s action was “counterproductive” towards helping users get their money back, and called the complaint a “manufactured parking ticket.”

Gensler’s targeting of yield programs comes a year after one of these products played a major role in the collapse of the entire crypto market. Last year, a crypto protocol called Anchor promised investors a staggering 20% yield if they put their money inside the Terra-Luna ecosystem. Many critics, even those within the industry, said that Terra-Luna’s model was unsustainable, and sure enough, it came crashing down last May.

Read More: What We Can Learn From Terra’s Fall

Two weeks ago, Gensler charged the creators of this ecosystem, Terraform Labs and founder Do Kwon, with securities fraud, saying that they misled and deceived investors. “This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws,” Gensler wrote in an accompanying statement.

Ripple effects

While the SEC is leading the charge against crypto, other governmental agencies have also turned against the industry. The Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) released a joint statement last week warning banks about the liquidity risks of stablecoins. The White House released a statement warning of the risks associated with crypto earlier in February. And the New York Department of Financial Services announced it had ordered Paxos, the issuer of the world’s third-largest stablecoin, Binance USD, to stop minting new units of the crypto token.

All of this means that crypto organizations of all stripes, from miners to exchanges to lenders, will likely become much more skittish about doing business in the U.S. lest they risk regulatory action. Many Decentralized Finance (DeFi) companies already offer products to investors abroad while restricting U.S. users, a trend that could escalate.

“Overall, the interest of investors looking to finance development in the space is certainly waning,” Smith, at the Blockchain Association, says. “Developers have to be thinking twice about starting something here in the United States.”

Smith says that the SEC is taking a “no-stone-left-unturned” approach, impacting crypto companies including staking providers, exchanges and centralized service providers, as well as venture capitalists. “If you look across the spectrum, he’s really working to touch all of these spaces,” Smith says of Gensler. “And the lending space is the most impacted: it’s more or less non-existent today. Almost all those providers have faced an enforcement action or are winding down their operations.”

This week, many crypto enthusiasts shared a claim on Twitter that the SEC had shut down a $75 million crypto metaverse fund managed by the company Everyrealm, as part of its crackdown efforts. However, Jesse Stein, the head of asset management at the company, disputed this characterization in an interview with TIME. Stein says that while Everyrealm had decided in February not to proceed with an investment offering that contained virtual real estate in blockchain-based worlds like Sandbox and Decentraland, the decision had nothing to do with the SEC’s approach to crypto.

“The SEC did not contact us or do anything that forced us to close this offering or impacted our interest in moving it forward,” Stein says.

Stein says that he has no plans to slow his blockchain-based investments, and that he actually welcomes Gensler’s approach to crypto. “Our company doesn’t mind at all, because we have tried to do everything as compliantly as possible,” he says. “If the SEC continues to move in this direction and the market becomes fully regulated—and if these projects are truly viable—then you will see institutional capital come in. I do think at the end of the day, it is going to be a net positive for the industry.”

Smith and the Blockchain Association, meanwhile, are weighing their options against Gensler’s latest flurry of regulatory action. Some crypto companies have been locked in legal battles with the SEC for months or years over similar fault lines, including Ripple and Grayscale.

“We’re working with our legal team and outside lawyers to try to figure out if there is some proactive pushback we should be doing in the courts,” Smith says. “We think this is a fight worth fighting.”