US crypto crackdown could impact on wider banking industry

Hinesh Shah of Pinsent Masons said action taken by the Securities and Exchange Commission (SEC) against some of the largest firms in the crypto industry showed that US regulators “are clearly being proactive in acting against digital asset firms who are not complying with the governance standards expected of them.” But he warned that the enforcement action could damage more traditional financial institutions too if regulatory scrutiny spreads from crypto asset firms to the banks they rely on for payments.

“Markets have previously considered the two sectors to be distinct, but there is an inherent interrelatedness between the two. The level of contagion will be an important factor in determining what impact the regulatory action being taken by the SEC and others will have on the banking sector,” said Shah.

His comments came after the SEC launched legal action against two major firms for failing to register a crypto-lending scheme as a securities offering.

The SEC has also ordered one crypto exchange to abandon a scheme offering more than 20% returns to customers and proposed tougher safeguards for investor assets after several crypto companies collapsed last year. Officials said the turmoil had revealed that customer funds were not as safe as had been advertised.

Tom Aries of Pinsent Masons said: “Regulators globally are now intervening in the crypto space with some pace following a number of high-profile scandals. While crackdowns may be necessary and appropriate in some areas of the industry, it will be important for regulators to strike the right balance. Too much intervention and they could stifle innovation and push industry participants to other markets. Too little and they risk potentially not having done enough to protect consumers and markets.”

Aries added that the issue was further complicated by the cross-jurisdictional considerations that the crypto industry raises. “It may require coordinated responses, making a fine line to tread even thinner,” he said.

David Hamilton of Pinsent Masons said: “The area of financial promotions also demonstrates the increasing cross-over between the crypto and traditional financial services worlds. The UK is due to extend its financial promotions regime to include a wider cohort of crypto investments, requiring firms to obtain sign-off from FCA-authorised persons before they can advertise their products.”

He added: “Those signing off crypto adverts as fair, clear and not misleading bear potential liability if adverts are subsequently found wanting by regulators. In light of recent crypto-related interventions by the Advertising Standards Agency and the FCA, authorised persons may think twice before taking on that responsibility.”