SEC Enforcement Doubles Down on Crypto

On April 4, 2022, Gary Gensler gave a speech in which he discussed the need for the US Securities and Exchange Commission (SEC) to increase regulation and enforcement of the roughly $2 trillion crypto market. One month later, the SEC made an early morning announcement that it is nearly doubling the size of the group within the Division of Enforcement tasked with monitoring securities law violations in the crypto and cyber space—adding 20 new positions, including supervisory positions, investigative attorneys, trial counsel, and fraud analysts. Whether entirely new full-time positions pursuant to the SEC’s request for 33 new hires for the unit in its recent FY 2023 Congressional Budget Justification, or an allocation of staff from other program priorities at a time when the markets are highly volatile, this unprecedented commitment of so many new positions to one unit within the Division is a clear sign that the SEC is doubling-down on its crypto enforcement.

The newly-renamed Crypto Assets and Cyber Unit (formerly the Cyber Unit) was first created in 2017, when “violations involving distributed ledger technology and initial coin offerings” was but one of several areas of cyber-related misconduct facing increased scrutiny. While there were roughly 1,300 cryptocurrencies worldwide in 2017, today there are more than 10,000; and crypto platforms have gone mainstream, spending tens of millions of dollars to reach investors through commercials during the 2022 Super Bowl. Over the past five years, the unit has stayed vigilant of crypto misconduct, bringing more than 80 actions against individuals and entities “seeking to take advantage of investors in crypto markets,” and obtaining nearly $2 billion of monetary relief from matters involving fraudulent and unregistered crypto asset offerings and platforms. Indeed, the unit announced two crypto-related lawsuits last week; one involving misrepresentations about an automated digital asset trading bot, with the other involving an offering and misappropriation fraud related to unregistered digital asset securities. 

The SEC’s press release highlights six areas where the unit will “leverage the agency’s expertise to ensure investors are protected in the crypto markets.” These include:

• Crypto asset offerings;
• Crypto asset exchanges;
• Crypto asset lending and staking products;
• Decentralized finance (DeFi) platforms;
• Non-fungible tokens (NFTs); and
• Stablecoins.

While the Crypto Assets and Cyber Unit will continue to monitor cyber-related threats and bring actions against SEC registrants and public companies for failing to appropriately disclose cyber-related risks and incidents, Enforcement Director Gurbir Grewal makes clear that the unit’s investor-protection focus will be on crypto. “Crypto markets have exploded in recent years, with retail investors bearing the brunt of abuses in this space…. The bolstered Crypto Assets and Cyber Unit will be at the forefront of protecting investors and ensuring fair and orderly markets in the face of these critical challenges.” It bears noting that the Department of Justice recently established a National Cryptocurrency Enforcement Team, reflecting a broader crypto enforcement initiative under the Biden-Harris Administration.

One final note – the SEC requested 125 new hires for Enforcement in its recent FY 2023 Congressional Budget Justification, which is a substantial increase from the nine positions it requested in FY 2022. The positions are allocated as follows: 44 positions for increased capacity to investigate misconduct and accelerate the timing of Enforcement actions; 34 for litigation support; 33 for Crypto Assets and Cyber Unit; and 14 for accounting and operational support. This is the strongest signal yet that the SEC is poised to increase Enforcement investigations and activity, and is committed to litigating matters when necessary.

Arnold & Porter continues to monitor the rapidly evolving crypto market and recommend best practices for our clients. If you are seeking advice on how to reduce crypto or cyber related enforcement risk, or how to incorporate these factors into your risk management or disclosures processes, please contact any author of this Advisory or your regular Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.