A timeline of cryptocurrency regulation in America (Part 4): The Crypto Collapse
Cryptocurrency regulation
Our series on the history of cryptocurrency regulation in America concludes with a look at the 2022 crypto collapse. One after another, several major crypto firms filed for bankruptcy, causing Bitcoin and Ether to plunge in value. But even as many crypto founders faced criminal charges, the regulatory environment was still characterized by confusion and contradictions.

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Our previous instalment of this exhaustive timeline of cryptocurrency regulation ended with the SEC head’s statement on regulatory clarity and Bitcoin hitting its highest price. We now move on to Bitcoin’s precipitous fall and cryptocurrency’s ‘ice age’, concluding our review in January 2022.

Crypto collapse begins: The current ice age 

December 13, 2021: SEC Commissioner Peirce states she is “disappointed” in the failure of the chairman’s regulatory agenda to provide clarification on cryptocurrency. 

December 15, 2021: Acting CFTC Chairman Rostin Benham is unanimously confirmed by the U.S. Senate and sworn in on January 4, 2022. 

January 21, 2022: Bitcoin has fallen to $35,000. Ether is $2,400. 

February 14, 2022: The SEC announces it is charging BlockFi, a cryptocurrency custodian and exchange, for failing to register its “BlockFi Interest Account” products which generated interest for depositors. BlockFi pays a total of $100 million in penalties. 

April 29, 2022: A note in an SEC file indicates the SEC Chairman’s staff met with FTX to discuss the custody of digital asset securities and the “conditional no action relief discussed in the statement.” This note seems to signal that the SEC provided conditional guidance to FTX that it would take no action against it. 

May 16, 2022: CFTC Chairman Benham states in a CNBC interview that Bitcoin and Ethereum are commodities.  

Bitcoin is $30,000. Ether is $2,000. 

June 9, 2022: U.S. Senator Kirsten Gillibrand states: “Bitcoin and Ether would certainly be commodities, and that’s agreed upon. That’s agreed with [SEC] Chairman Gensler as well as the chairman of the CFTC.” At the same event, CFTC Chairman Benham stated there are many commodity coins “such as Bitcoin and Ethereum” that should be regulated by the CFTC. 

June 12, 2022: Major cryptocurrency exchange and custody agent Celsius freezes withdrawals for users. This means users cannot withdraw any funds, despite having been told they always had access to their assets. This sparks the beginning of crypto contagion. 

June 16, 2022: It is reported that major cryptocurrency hedge fund Three Arrows Capital (“3AC”) cannot meet its margin call, effectively meaning it has no money. 3AC owes money to the cryptocurrency exchange Voyager.  

June 17, 2022: Ether bottoms at $993. Bitcoin is $18,948. 

June 21, 2022: SEC Commissioner Peirce states: “[w]hen things are a bit harder in the market, you discover who’s actually building something that might last for the long, longer term and what is going to pass away.” She also states she does not support bailouts:  

“Crypto does not have a bailout mechanism. And that’s been perceived as one of the strengths of that marketplace. I don’t want to come in and say that we’re going to try to figure out a way to bail you out if we don’t have the authority to do it. But even if we did, I would, I would not want to use that authority, we really need to let these things play out.” 

The same day, BlockFi CEO Zac Prince announces a $250 million revolving credit facility from FTX “providing us with access to capital that further bolsters our balance sheet and platform strength.” 

June 27, 2022: SEC Chairman Gensler in a CNBC interview confirms that Bitcoin is a commodity and adds “That’s the only one I’m going to say,” implying that Ether may be a security. This seemingly contradicts Hinman’s speech in June 2018, SEC Chairman Clayton’s letter in March 2019, and Senator Gillibrand’s statement on June 9, 2022.  

Ether is $1,200, while Bitcoin is $21,477.  

July 1, 2022: Voyager, a cryptocurrency exchange, freezes all withdrawals for users, like what Celsius did on June 12, just weeks prior. 

July 6, 2022: Voyager announces it has filed for bankruptcy. Voyager holds approximately $1.4 billion in user funds. Users accounts and funds are still frozen. 

July 8, 2022: The company blockchain.com reveals it lost $270 million from exposure to 3AC. 

July 13, 2022: Celsius announces it has filed for bankruptcy. Celsius holds approximately $4.3 billion in user funds but $5.5 billion in liabilities. User accounts and funds are still frozen. 

July 19, 2022: Former employees of bankrupt Celsius come forward and say “the biggest issue was a failure of risk management.” 

September 13, 2022: The SEC announces the creation of an “Office of Crypto Assets” dedicated to focusing on company filings. 

September 16, 2022: On the same day that the Ethereum blockchain merged to “Proof of Stake,” SEC Chairman Gensler states to reporters that allowing users to “stake” their cryptocurrencies may define them as securities under the Howey test. He tells the Wall Street Journal that “from the coin’s perspective…that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others.” 

September 22, 2022: The CFTC announces the initiation and settlement of charges against two individuals who founded a decentralized trading platform called bZeroX. The two individuals are accused of “illegally offering leveraged and margined retail commodity transactions in digital assets; engaging in activities only registered futures commission merchants (FCM) can perform; and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs.”  

On the same day, the CFTC also files a civil lawsuit against Ooki DAO, the successor to bZeroX. This move draws criticism when the CFTC attempts to serve the lawsuit on Ooki DAO founders through a help chat box on its website. A federal judge ultimately orders the CFTC to serve the defendants properly. 

It should be noted that the SEC’s DAO Report, issued in July 2017, found that DAO Tokens were securities. Even though the facts and circumstances between the DAO Report and the Ooki DAO lawsuit may be totally unrelated beyond the shared use of the word “DAO,” it creates confusion because the SEC issued the DAO Report and asserted jurisdiction, but the CFTC is now suing Ooki DAO under commodities laws. 

October 12, 2022: SEC Commissioner Peirce calls on Congress to pass legislation to provide regulatory clarity in the cryptocurrency market.  

October 24, 2022: At an event titled “Regulating Financial Innovation,” CFTC Chairman Benham states, “Ether, I’ve suggested that it’s a commodity – not a security.” “Chairman Gensler thinks otherwise — or at least hasn’t certainly declared one or the other,” he adds. 

October 31, 2022: SEC Commissioner Peirce again criticizes the SEC’s regulation attempts, noting: “Nobody else is in the room. The customers aren’t in the room. The competitors aren’t in the room. And the regulator has the leverage because the regulator’s about to bring an enforcement action. It’s just not a good way of regulating.” She also picked up the divide between the SEC and CFTC, stating: “Now more and more, I’m hearing people say, ‘Well, I’m just going to go to the CFTC and hope that they come up with a regulatory regime we like. . . That is too bad, that people have given up on us. . . because we haven’t taken those steps to work in good faith.”

The SEC still has not produced a single cryptocurrency-related exemptive order, which is a statement from the agency clarifying that certain action would not be considered a securities violation or pursued by the SEC as such. 

November 8, 2022: FTX freezes all cryptocurrency withdrawals for its customers. Considering the bankruptcies of Voyager and Celsius were both preceded by freezing of client withdrawals, the market knows what is about to happen.  

Bitcoin is $18,501. Ether is $1,330. They both fall rapidly overnight.  

November 9, 2022: Bitcoin hits a bottom of $15,750. Ether bottoms at $1,069. 

November 10, 2022: Minnesota Representative Tom Emmer publicly accuses SEC Chairman Gensler on Twitter of helping disgraced crypto exchange FTX, and its founder Sam Bankman-Fried, obtain a regulatory monopoly. 

November 11, 2022: FTX files for bankruptcy, reporting owing creditors more than $3 billion. The same day, SEC Commissioner Peirce states that FTX’s downfall could be the catalyst government agencies needed to finally “sit down” and create clear regulations. She also states that the regulation of digital assets could be more productive and efficient if the CFTC and the SEC coordinated in some fashion. 

November 22, 2022: Belgium’s financial regulatory body confirms that Bitcoin, Ether, and other cryptocurrencies that are issued solely by computer code do not constitute securities.  

November 28, 2022: BlockFi files for bankruptcy, reporting an $8-billion hole on its balance sheet. User accounts and funds are frozen. A few weeks before the filing, the company had said: “We do have significant exposure to FTX and associated corporate entities that encompasses obligations owed to us by Alameda, assets held at FTX.com, and undrawn amounts from our credit line with FTX.US.” 

November 30, 2022: At a Princeton University event, CFTC Chairman Benham suggests that Bitcoin was the only cryptocurrency that should be viewed as a commodity. This contradicts his prior statements on October 24, 2022 and May 16, 2022, and statements made by prior CFTC Chairmen on January 14, 2020 and October 10, 2019. He also admits that the matrix between regulators is an “imperfect system.” 

December 7, 2022: SEC Chairman Gensler states in an interview that crypto firms are running out of time to comply with securities laws. Gensler is questioned why it’s taking so long for cryptocurrency companies to register with the SEC. He blames the companies. “It’s really on them,” says Gensler. “We’ve been clear.” 

December 12, 2022: FTX CEO Sam Bankman-Fried is arrested in the Bahamas at the request of U.S. prosecutors. 

December 13, 2022: The CFTC files its lawsuit against FTX, Sam Bankman-Fried, and Alameda Research. In the lawsuit, the CFTC repeatedly labels Ether as a commodity, seemingly contradicting CFTC Chairman Benham’s statement two weeks prior, which itself had contradicted other prior statements he made. Chairman Benham also adds that “Digital commodity asset markets continue to present risks for investors due to the lack of basic protections.”  

The same day, the SEC filed charges against Sam Bankman-Fried alleging he orchestrated a scheme to defraud equity investors in FTX Trading Ltd., the crypto trading platform of which he was the CEO and co-founder. In the charges, the SEC – for the first time – alleges that FTT, the FTX token created in July 2019, is an investment contract security.  

The CFTC and SEC are now both asserting jurisdiction over those entities. While it is proper for the SEC to pursue securities fraud and for the CFTC to pursue commodities fraud, the overlapping of authority will only further complicate an already “imperfect system.” 

December 18, 2022: SEC Commissioner Hester Peirce outlines problems with the Howey test. “If we were more precise, I think that there would be fewer objections to applying the Howey test and saying, ‘Hey, that initial time when you sold it, that might well have been a securities offering,’ but that doesn’t mean that the token continues to be a security for the rest of its life,” she says. 

December 21, 2022: The SEC announces that FTX co-founder Gary Wang and ex-Alameda Research CEO Carolina Ellison have pled guilty to financial fraud charges related to their “roles in a multiyear scheme to defraud equity investors in FTX.” 

December 22, 2022: Former CFTC Chairman Massad claims lack of regulation was not the issue, and blames cryptocurrency companies for not “following the rules that are already in place.”  

The same day, disgraced FTX CEO Sam Bankman Fried makes $250 million bail, is released with restrictions not to leave his parents’ home in California, and must undergo regular mental health treatment and evaluation. 

December 29, 2022: The SEC files a motion in a civil lawsuit against Ripple Labs (Ripple), the issuer of the cryptocurrency XRP, seeking to have materials related to the Hinman speech sealed. The Hinman speech was referenced above and occurred on June 14, 2018, wherein Hinman proclaimed that Ether was not a security. The SEC first sought to prevent Ripple from viewing the documents at all – claiming they were confidential. Ripple intended to use Hinman’s speech, and his records, to defend against the SEC’s allegations that XRP is a security. In October 2022, a federal judge ruled that the SEC must give Ripple the documents. The SEC’s “about-face” on Hinman’s statements, coupled with its desire to hide Hinman’s records from the public and from Ripple itself, only further complicates the quagmire. 

After being forced to turn over the documents to Ripple, the SEC’s December 29, 2022, motion seeks an order preventing Ripple from sharing the documents with the public. According to the filing, if the documents were to become public, “the SEC would be foreclosed from making any such argument in the future…which would be highly prejudicial to the SEC.” 

The motion states:

“Regardless of whether these documents reflect agency deliberations that should be protected by the deliberative process privilege, they unquestionably reflect confidential deliberations. SEC officials repeatedly express their views and positions on issues of programmatic significance to the SEC. The ability of agency officials to debate and collaborate with openness and candor would be hampered by the public dissemination of these documents.”

January 3, 2023: In a first-ever joint statement to banks, the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), describe several key risks associated with cryptocurrency assets. 

January 5, 2023: New York State Attorney General Letitia James announces a lawsuit against Celsius’ former CEO, claiming he defrauded hundreds of thousands of investors out of billions of dollars. 

Bitcoin is $16,800. Ether is $1,250. 

January 9, 2023: The CFTC charges Avraham Eisenberg, accusing him of manipulating the Mango Markets decentralized exchange and stealing over $110 million in digital assets. These charges are accompanied by criminal charges from the U.S. Justice Department. 

January 12, 2023: The SEC charges Genesis and Gemini for the sale of cryptocurrency asset securities. 

A new hope? 

Bitcoin climbs to $18,800 for the first time since November 8, 2022 – the same day that FTX froze withdrawals. 

Conclusion and fallout 

Makes a lot of sense, right? No. It’s a tangled mess of personnel changes, contradictory statements, overlapping enforcement attempts, and unclear direction. It’s not fair to completely blame the cryptocurrency industry for failing to comply with laws that even the CFTC and SEC cannot explain or apply. There are SEC Commissioners doubting the efficacy of the Howey test at the same time the SEC Chairman is signaling that “time is running out” to comply. Likewise, the current CFTC Chairman is publicly stating that there needs to be additional regulation, whereas the former CFTC Chairman is blaming companies for not following the rules “already in place.”  

If the above timeline proves anything, it is that the current regulatory scheme is unworkable. The SEC and CFTC have reversed themselves and changed their positions so many times in the last four years – with numerous different officials holding office and giving different opinions – that it’s practically impossible for the average person to understand how to comply. Now, the SEC is seeking to hide its own records related to public statements it made about the regulatory status of the world’s second largest cryptocurrency, Ether. It also has now decided that the FTT Token, in existence since July 2019, is a security. Regulators knew the token existed when Sam Bankman-Fried was making political donations and buying stadium-naming rights, but only acted after it was too late. 

This “regulation by enforcement” approach is good at punishing bad actors, but it’s not so good at preventing the bad from occurring. It is patently unfair that some individuals who relied upon prior agency statements may now be deemed to have violated securities laws and could spend years in prison. This lack of regulatory clarity stifles innovation and runs the risk of seeing the U.S. fall behind in these technologies. Many companies have decided to operate offshore for this very reason. Others refuse to do business with America at all, using IP-tracking and geofencing to block anyone from the U.S. from visiting their websites to avoid liability. I fundamentally believe that most cryptocurrency users and companies are not scams. Yet, due to an unworkable patchwork of contradiction, changing personnel, and amorphous positions, any good-intentioned company trying to do the right thing could wake up to the SEC knocking at their door. 

As mentioned in the beginning of this article, there are thousands of cryptocurrencies. After 14 years, it appears there is regulatory certainty only for Bitcoin. But how long will that even last? Who can say that the CFTC and SEC won’t change their minds again? Also, if the regulators cannot make heads or tails of the second most popular and well-known cryptocurrency on Earth, how do they expect small startups to make the right regulatory decisions and comply? Innovation and growth in the cryptocurrency space will not stop. The nature of the technology means that it can be coded and deployed anywhere on the planet without need for a nation state’s approval. If the U.S. does not clarify the regulatory statuses of these technologies, then innovators will pack up shop, go to other countries, and pay taxes there.

Sean Gellis is the founder of Gellis Law, PLLC, a Florida-based legal and consulting firm focused on GovTech and regulation. Prior to opening his firm, Sean spent nine years in public service, including as the chief of staff for the business arm of Florida government and general counsel of the nation’s third largest state transportation department.

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Ariel Visconti
Written byAriel Visconti
Ariel Visconti researches and writes on government and politics, regulation, occupational licensing, and emerging technologies.

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