So far, U.S. regulators have secured over $19 billion in settlements from crypto companies in 2024, and that is almost two-thirds of all the settlements ever recorded in the industry. With eight major settlements this year, the total amount collected is 78% higher than in 2023’s $10.87 billion. It’s also a massive 8,327% jump from 2022.
The largest settlements came from familiar names: FTX, Terraform Labs, and Genesis. The bankrupt crypto exchange FTX and its sister trading firm, Alameda, paid the highest so far; they agreed to a $12.7 billion settlement with the Commodity Futures Trading Commission (CFTC) in August. For its role in the collapse of TerraUSD (UST), Terraform Labs settled for $4.47 billion with the Securities and Exchange Commission (SEC). Genesis, which filed for bankruptcy in early 2023, agreed to pay $2 billion to the Office of the Attorney General (OAG).
If the regulators keep up this streak, 2024 may break even more records. We have to wait and see it out.
Unraveling the Forces Behind the Billion-Dollar Payouts
According to CoinGecko research analyst Lim Yu Qian, the collapses of Celsius and Terraform Labs in mid-2022 kickstarted the chain of events that eventually led to FTX’s collapse and increased scrutiny from U.S. regulators.
The scrutiny of the industry has brought forth somewhat clear rules. The term “somewhat” applies because these rules largely rely on existing regulations, such as the Securities Act of 1933 and the Investment Company Act of 1940, which the SEC used in its case against Terraform. Although this approach may not be ideal, it has provided a framework for how crypto businesses should manage trading, token sales, and customer funds.
With these guidelines in place, companies can more easily understand what is legal and what isn’t. This clarity has led to a rise in crypto settlements because when companies violate these established rules, they are more likely to reach settlements with regulators to avoid lengthy legal battles.
Better Tools for Law Enforcement
Also, these regulatory agencies have strengthened their enforcement capabilities to better monitor and enforce crypto regulations. They’ve hired experts in cryptocurrency and blockchain technology and invested in advanced tools that can track suspicious activities, like illegal trading or fraudulent schemes. These deliberate acts have allowed the regulators to identify violations faster, leading to more settlements with companies that have broken the law.
For instance, the SEC’s Cyber Unit, dedicated to investigating crypto-related fraud, played a central role in Terraform Labs’ investigation in 2023. Thanks to the team’s efforts, the agency was able to file charges against the company and co-founder Do Kwon for allegedly misleading investors about TerraUSD’s stability.
The Mandate to “Protect Investors”
This has become a very strong theme of regulatory action in recent years after the back-to-back collapses of big crypto companies. The regulators always claim their actions are based on this mandate to make sure U.S. investors are safe from fraud and unethical practices in the cryptocurrency market.
As a direct consequence, the anti-fraud measures that are commonly used in the broader financial industry are now being strictly enforced in the cryptocurrency sector. Crypto companies are now required to verify their customers’ identities through Know Your Customer (KYC) regulations and to follow rigorous anti-money laundering (AML) procedures.
Firms that fail to meet these standards face heavy fines, often leading to settlements. For example, BlockFi incurred a $100 million penalty from the SEC for not properly registering its lending product.
Industry Implications: Compliance, Stability, and Investor Confidence
The increase in settlements signals that U.S. crypto companies must now operate under stricter guidelines, effectively warning others in the sector to comply or risk similar penalties. In the long run, such measures, though rigorous, ultimately foster a safer and more stable investment environment.
A regulated market also minimizes the risk of sudden failures due to fraudulent activities. When investors feel safer in their transactions, they are more likely to invest in the crypto market. This stability will also attract larger, more cautious investors who prefer to invest in regulated environments.
Rising Compliance Costs
However, this stability and increased confidence come with its cons. Heightened compliance requirements mean crypto companies have to deal with increased operating expenses. They must now hire legal and compliance experts familiar with crypto regulations, establish policies in line with legal requirements, and invest in sophisticated monitoring systems to detect suspicious transactions. While essential for compliance, these investments present substantial upfront and ongoing costs.
Balancing Compliance with Innovation
While increased regulation may benefit the industry’s credibility, it can also hinder innovation, especially for startups that may struggle to meet demanding compliance standards. The additional regulatory burden could slow the pace of new ideas and products in the market.
On the other hand, the focus on regulation might prompt companies to innovate within a secure, compliant framework, fostering more stable financial products. Companies that successfully navigate these challenges may gain a reputation for reliability, attracting investors who value regulatory compliance.
In summary, while the new regulatory landscape presents challenges, it fosters a safer, more stable market with the potential for long-term growth. Regulatory clarity is positioning the U.S. crypto market for sustained development by enhancing investor confidence and reducing fraudulent activities. Companies that adapt to these demands may not only survive but thrive in a more structured and trustworthy environment.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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