Key Takeaways
- SEC enforcement actions related to crypto and cyber are expected to significantly increase with the additional 20 staff assigned to the Division of Enforcement unit dedicated to these industries.
- The SEC is expected to bring cases based on both prior and future conduct involving crypto-related offerings, exchanges, lending and staking products, decentralized finance (DeFi), nonfungible tokens (NFTs), and stablecoins.
- Cryptocurrency and DeFi teams that are currently considering how to structure their projects or networks should pay even closer attention to compliance with the securities laws and should work with securities law counsel with experience in the cryptocurrency space.
Summary
On May 3, the U.S. Securities and Exchange Commission (SEC) announced the expansion of its Crypto Assets and Cyber Unit (the Unit f/k/a the Cyber Unit) to 50 staff members, nearly double the Unit’s former size, including supervisors, investigative staff attorneys, trial counsel and fraud analysts.[1] The Unit is a group within the Division of Enforcement. It was created in 2017 to target cyber-related misconduct and establish a retail strategy task force that develops initiatives to identify misconduct that impacts retail investors.[2]
SEC Chair Gary Gensler stated that the expansion will better enable the Unit to “police wrongdoing in the crypto markets while continuing to identify disclosure and controls issues with respect to cybersecurity.”
According to the SEC press release, the expanded unit will focus on investigating securities law violations related to:
- Crypto asset offerings.
- Crypto asset exchanges.
- Crypto asset lending and staking products.
- DeFi platforms.
- NFTs.
- Stablecoins.
It will also continue to tackle cyber-related threats to the nation’s markets.
“Crypto markets have exploded in recent years, with retail investors bearing the brunt of abuses in this space. Meanwhile, cyber-related threats continue to pose existential risks to our financial markets and participants,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “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.”
Since its creation, the Unit has brought more than 80 enforcement actions related to fraudulent and unregistered crypto asset offerings and platforms, resulting in monetary relief totaling more than $2 billion. The Unit has also brought numerous actions against SEC registrants and public companies for failing to maintain adequate cybersecurity controls and for failing to appropriately disclose cyber-related risks and incidents.
Notably, in its annual Congressional Budget Justification, the SEC requested for 2023 an additional 125 staff members to join its Division of Enforcement, 33 of whom were requested for the Unit, 34 for litigation, and 44 to help address misconduct and “accelerate enforcement actions,” and emphasized crypto. Conversely, for 2022, the same report by the SEC requested only nine new positions in the enforcement division and only briefly mentioned digital assets.
This expansion sends yet another clear signal to the crypto industry that federal regulators are ready to increase enforcement actions against those they perceive may be abusing digital asset systems. In the wake of the Department of Justice’s creation of its National Cryptocurrency Enforcement Team, and the Internal Revenue Service’s announcement of its own task force – Operation Hidden Treasure – now is the time for companies in the industry to review and update their compliance programs.
Conclusion
As the SEC signals a focus on crypto- and cyber-related enforcement initiatives, we can expect existing cases to gain speed and new investigations and enforcement actions to be initiated swiftly and aggressively. The BakerHostetler White Collar, Investigations, and Securities Enforcement and Litigation team and Blockchain Technologies and Digital Currencies team are comprised of dozens of experienced individuals, including attorneys who have served in the Department of Justice and SEC. Our attorneys include former United States attorneys, branch chiefs and unit chiefs as well as partners who have served in the SEC’s Division of Enforcement and the SEC’s Office of the General Counsel, and attorneys with extensive experience across all sectors of the blockchain and cryptocurrency markets, including investigations, Bank Secrecy Act/anti-money laundering compliance, tax, privacy, transactions, intellectual property, media and technology design.
[1] SEC Nearly Doubles Size of Enforcement’s Crypto Assets and Cyber Unit, SEC Press Rel. 2022-78 (May 3, 2022), available at https://www.sec.gov/news/press-release/2022-78.
[2] SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors, SEC Press Rel. 2017-176, available at https://www.sec.gov/news/press-release/2017-176.
[View source.]
