In 2024, the SEC generated $4.7 billion, is the cryptocurrency industry becoming a "cash cow"?

Author: Wenser, Odaily Planet Daily

Recently, an industry report regarding the enforcement fines in the U.S. SEC's cryptocurrency sector has attracted considerable attention—mentioning that the U.S. SEC's cryptocurrency enforcement fines will reach $4.7 billion in 2024—it's worth noting that this figure was only $150.3 million in the fiscal year 2023, an increase of over 30 times.

With the recent approvals of Bitcoin spot ETFs and Ethereum spot ETFs, the line between traditional finance and the cryptocurrency industry is becoming increasingly blurred, and the influence of the U.S. SEC on the cryptocurrency sector is growing. This article provides a brief analysis of the hidden information behind the U.S. SEC's enforcement fines based on the report for industry professionals' reference.

Sky-high Fines: 4 Cryptocurrency Projects Accumulate Fines of Up to $6.58 Billion

4 Sky-high Fines

In terms of the amount, the SEC's 4 "sky-high fines" include the following events:

The Originators of UST & LUNA: Terraform Labs and Founder Do Kwon

The U.S. SEC imposed a fine of up to $4.68 billion on Terraform Labs and its founder Do Kwon for misleading investors and offering unregistered securities. The details of the fine are as follows: "As part of the settlement, Terraform agreed to pay $3.586875883 billion in illegal gains, $466.524423 million in pre-judgment interest, and $420 million in civil penalties. Terraform also agreed to cease selling its crypto asset securities, wind down operations, replace two directors, and distribute remaining assets to investor victims and creditors through a liquidation plan, which requires approval from the court overseeing Terraform's ongoing bankruptcy case. Do Kwon agreed to jointly bear $110 million in illegal gains and $14.32196 million in pre-judgment interest, as well as $80 million in civil penalties."

Despite the news, Fortune magazine claimed that "Terraform Labs has declared bankruptcy and is unable to pay the SEC's massive fine of $4.47 billion." At the end of July, the SEC also stated, "The SEC will not receive any compensation until investors and creditors receive full compensation from the corresponding bankruptcy case."

Currently, the latest progress on this fine is that the Terra project announced in August that the Chapter 11 bankruptcy hearing for Terraform Labs Pte Ltd (TFL) and Terraform Labs Limited (TLL) will be held on September 19, 2024, at 10 PM Beijing time (10 AM Eastern Time).

The Social Giant Involving Nearly 1 Billion Users: Telegram Group Inc. and TON Issuer Inc.

Telegram was fined $1.24 billion by the U.S. SEC for illegally selling unregistered digital tokens in its TON (Telegram Open Network) initial coin offering (ICO). The U.S. SEC intervened, halting the project and emphasizing the importance of registration and compliance when raising funds through token sales.

According to the U.S. SEC's related information: "The defendants (referring to Telegram and the former TON) sold approximately 2.9 billion digital tokens called 'Grams' at a discounted price to 171 initial purchasers worldwide, including selling over 1 billion Grams to 39 U.S. purchasers. Telegram promised to deliver Grams to initial purchasers no later than October 31, 2019, after the launch of its blockchain, at which point purchasers and Telegram would be able to sell billions of Grams in the U.S. market. The complaint alleges that the defendants failed to register their offers and sales of Grams (securities), violating the registration provisions of the Securities Act of 1933."

The subsequent events are well-known; Telegram handed TON over to the "community," refunded part of the ICO funds ($1.2 billion), and accepted corresponding penalties ($18.5 million).

The Most "Traditional Financial" Episode: GTV Media Group Inc., Saraca Media Group Inc., and Voice of Guo Media Inc.

These entities were fined $539.43 million for illegally issuing GTV common stock and digital asset securities without registration. The SEC's actions aimed to address the lack of transparency and regulatory compliance in their issuance, protecting investors from fraud and misinformation.

It is evident that digital asset securities related to media groups are also within the "range" of the U.S. SEC.

The Pending "Securities" Case: Ripple Labs Inc.

Ripple Labs faces a fine of $125 million for selling XRP as an unregistered security. This case is one of the most closely watched in the cryptocurrency sector, involving the debate over whether XRP should be classified as a security under U.S. law. The SEC filed this case to protect investors from fraudulent activities and emphasized the need for stricter regulation of ICOs and token sales.

The case reached a preliminary conclusion in early August this year, with "a U.S. judge ruling that Ripple's sales of XRP to retail investors did not violate federal securities laws," but Ripple still needs to pay the $125 million fine. Just days ago, Ripple also requested the judge to suspend the SEC's $125 million fine ruling.

In summary, the main reasons for the hefty fines lie in ICO token sales, unregistered securities determinations, etc., and the related projects are all "figureheads" of the cryptocurrency industry, aligning with the U.S. SEC's purpose of "warning the tiger by shaking the mountain."

Fine Trends: Fewer Events, Larger Amounts

Looking back at the fine trends from 2014 to 2024, prior to 2018, the number of enforcement actions was in single digits, indicating that the U.S. SEC had limited attention on the cryptocurrency industry at that time, which also suggests that the cryptocurrency sector was in a primitive stage with limited scale.

From 2018 to 2023, as the market cycle transitioned between bull and bear, the cryptocurrency industry gradually matured, and the U.S. SEC's enforcement actions increased from 14 to 30; by 2024, coinciding with the 15th anniversary of Bitcoin and the 10th anniversary of Ethereum, along with the approvals of Bitcoin spot ETFs and Ethereum spot ETFs, the number of participants in the U.S. cryptocurrency industry exceeded 50 million, and the scale and momentum of the cryptocurrency industry can no longer be underestimated. Thus, the SEC's enforcement actions sharply dropped to 11 events, but the total fines have already reached a new high.

Statistics show that in 2018, the average fine amount was only $3.39 million, while by 2024, this figure has risen to an average of $426 million, an increase of 12,466.37%.

Landmark Years: 2019, 2021, 2024

In 2019, the average fine amount imposed by the U.S. SEC surged from $3.39 million to $70.68 million, with Telegram Group Inc. and the TON blockchain project being fined $1.24 billion for selling unregistered digital tokens, marking a "regulatory turning point." Compared to 2018, this figure increased by 1,979.05%, indicating a significant shift in the SEC's approach to handling regulatory violations in the cryptocurrency sector.

It is worth mentioning that the SEC chairman at that time was Jay Clayton, appointed during Trump's presidency and known as the "plague of Wall Street"—during his tenure, the SEC charged Tesla founder Elon Musk for posting misleading privatization messages on social media in 2018, ultimately leading to Musk settling with the SEC, resigning as Tesla's chairman, and paying a $20 million fine. **Moreover, the U.S. SEC's tough stance on the cryptocurrency industry also began during his tenure; Jay Clayton not only brought trading under securities law regulation but also restricted cryptocurrency fundraising activities and Bitcoin trading funds: in 2018, the SEC urged cryptocurrency trading platforms to register and accept further regulation, asserting that all digital cryptocurrencies except Bitcoin and Ethereum should be classified as securities and subject to U.S. securities laws, and that initial coin offerings (ICOs) "are essentially a type of securities issuance that must comply with specific regulatory requirements." Meanwhile, starting in 2018, the SEC delayed and rejected multiple asset management companies' Bitcoin ETF applications due to concerns over market manipulation and unclear regulatory rules, which once sparked market dissatisfaction.

By the end of 2020, it was reported that the SEC had completed the formulation of 65 final rules, collected $14 billion in fines, and paid approximately $565 million to whistleblowers, including a record $114 million bonus, the largest reward in the program's history. According to Politico, the total number of enforcement cases during Clayton's tenure reached 3,152, far exceeding that of the previous SEC chairman. Subsequently, the U.S. SEC chair was temporarily taken over by Allison Herren Lee.

In April 2021, the current U.S. SEC chairman Gary Gensler took office. As the former chair of the Commodity Futures Trading Commission (CFTC) during the Obama administration, a former Goldman Sachs investment banker, and a professor at MIT, Gary Gensler inherited Jay Clayton's tough stance on the cryptocurrency industry while also beginning his own "crypto-unfriendly regulatory journey" due to his familiarity with cryptocurrencies— in 2021, the average fine amount imposed by the U.S. SEC quickly rebounded to $35.2 million, an increase of 579.35% compared to 2020. It was in this year that the U.S. SEC initiated investigations and fines against Ripple, with Gary Gensler refocusing the SEC's attention on the main players in the cryptocurrency industry.

The "huge fines" in 2024 seem to mark the end of the "UST and LUNA crash incident" in 2022, as mentioned earlier, the specific execution still awaits the test of time.

Fine Amounts: Few High Fines, 76 Fines Below $10 Million

Looking back at past fine events, from 2020 to 2024, there were only 2 high fines at the $1 billion level, while there were as many as 76 fines below $10 million, indicating that, on one hand, small and medium-sized enterprises facing compliance issues are frequently penalized; on the other hand, it also shows that the U.S. SEC does not spare small projects either, with a broad scope of regulatory oversight.

Of course, from a trend perspective, the current attitude of the U.S. SEC is to take more impactful enforcement actions (such as higher fines, more vigorous publicity, etc.) against representative cases to set industry examples.

Conclusion: Regulation Matures with Industry Development, U.S. SEC Remains the "Sword of Damocles"

In 2013, during the early development of cryptocurrencies, the U.S. SEC imposed fines totaling $40.7 million;

In 2020, the U.S. SEC fined Robinhood Financial LLC $65 million;

In 2022, the U.S. SEC prosecuted individual actor Barksdales for fraudulent ICOs;

In 2023, the U.S. SEC filed charges against publicly traded exchanges like Coinbase;

In 2024, the U.S. SEC imposed a record fine of $4.68 billion on Terraform Labs and Do Kwon.

It can be said that as the cryptocurrency industry matures, the regulatory power represented by the U.S. SEC is gradually penetrating, serving as a warning to participants in the "dark forest" of cryptocurrencies, especially project parties and individuals or organizations engaging in fraud, much like the "Sword of Damocles" hanging overhead.

The development of the cryptocurrency industry may also need to carve out its own path through blood and fire, sword and frost.