Being one of the largest financial regulators, the United States Securities and Exchange Commission (SEC) has been acting as a regulatory watchdog and has been actively intercepting acts of fraud and illegal token sale within the crypto industry.
The SEC’s lack of tolerance for cryptocurrencies has often been considered as regulatory hostility towards the emerging industry, but the unregulated nature of cryptocurrencies that often encourage crypto crimes, make the SEC’s interventions a necessary evil.
Over the years the SEC has cracked down on several ICOs and crypto companies that have either duped investors or have conducted illegal token sales of what the regulators consider securities, without any approval from the SEC.
Along with the occasional restraining orders placed on the defendants, the SEC also tends to impose massive penalties on the guilty that go beyond returning just recovering the proceeds from the crime.
For instance, last year the SEC fined blockchain company Block.one a sum of $24 million for conducting an unregistered token sale in between June 2017 and July 2018. The SEC’s claimed that it wasn’t registered as securities in accordance with the federal securities laws, nor did it qualify for or seek an exemption from the registration requirements.
New rules for the SEC
However, things are changing as a recent ruling by the US Supreme Court on June 23 has placed a new limit on the way that the SEC can impose fines on the defending crypto and blockchain firms. The new limitations would also affect the fines imposed on some of the recent crypto-related cases.
As per the June 23 summary of the U.S. Supreme Court case Liu v. SEC in the National Law Review, the court has ruled that the SEC can’t impose fines (known as disgorgements) that surpass the net profits made from the said illegal activity.
Along with this, the court also clarified that these penalties can only be “awarded for the benefit of victims”, and not as punitive damages.
To better understand the ruling we need to take a look at the Liu v. case. The case involved the defendants Charles Liu and Xin Wang allegedly defrauding investors. According to the defendants they had only earned $8 million from the racket, but the SEC had imposed $27 million in disgorgement. Per the ruling, the SEC would only be able to fine $8 million.
The ruling applies to all defendants, but for the crypto and blockchain firms facing charges by the SEC, this is a stricter definition of the punishment must match the crime” when it comes to financial penalties.
In most cases, the SEC fines include all the ill-gotten gains, plus interest and civil penalties, which tend to exceed the original amount that the defendants make. Disgorgement is an “equitable” measure designed to set things right with investors. It’s not a punishment—that’s what penalties are there for.
According to Thomas Gorman, former senior counsel in the SEC Division of Enforcement, the latest ruling will have a major impact:
“Since Congress has given the SEC specific authority to impose a penalty, this meant that in many instances the Commission imposed double penalties – disgorgement and a statutory penalty. That was beyond unfair. Liu eliminates that unfairness returning much needed balance and fairness to the remedy process in SEC enforcement cases,” Gorman said in a statement.
While the ruling might alter the amount imposed by the SEC in some of the recent crypto-related cases, it won’t in any way change the way the SEC perceives the crypto industry and it would most definitely continue to operate as usual.
According to Compound Finance General Counsel Jake Chervinsky’s statement to Decrypt:
“This is a largely procedural ruling that shouldn’t have much impact on crypto. The SEC was already in the habit of seeking disgorgement in civil actions and here the Supreme Court upheld their authority to do so. This shouldn’t change their behavior at all.”