The SEC’s influence on the cryptocurrency industry is still being felt today. As it became known overnight, the main regulator filed a lawsuit against Terraform Labs and Do Kwon, the creator of the Terra ecosystem and the LUNA token. As noted by the agency, the cause of action was securities fraud.

Securities and Exchange Commission lawsuit against Do Kwon of Terra

It’s worth recalling that the collapse of the Terra ecosystem took place in May 2022 – that’s when the UST stabelcoin became detached from the value of the dollar and the LUNA price collapsed to near zero. All this led to tens of billions of dollars in losses for investors.

Terraform Labs co-founder Do Kwon

In this context, it’s rather amusing that it took the SEC eight months to take any action. In the case of FTX founder Sam Bankman-Fried, it took the regulator less time after the crypto-exchange collapse, though even then the response was slow.

Cryptocurrency regulation challenges

Pearce issued a statement once again questioning the regulator’s actions. According to her, the US Securities and Exchange Commission is trying to implement new stricter rules to control the industry in the near future, doing more harm than good.

Pearce’s criticism relates to a recently published proposal by Commission head Gary Gensler. In a nutshell: in a video on Twitter, he explained that the regulator is introducing new controls on the disposal of funds within the crypto industry. The agency will now more closely monitor that it is the qualified custodians who hold the funds, who are regularly audited.

As a reminder, custodians are parties that safeguard their own users' assets at their behest. A bank can be a custodian if it holds shares, precious metals or other assets of individuals.

On paper, such an approach looks good, but in practice such rules would give government agencies much more control over the flow of funds in the cryptosphere. What’s more, according to Pearce, the US Securities and Exchange Commission will ultimately fail to deliver on its project in a short timeframe. Here’s her rejoinder.

These rules have serious implications for investors, investment advisers and custodians. To implement them properly, we need public input.

That is, Pearce is explicitly saying that even if such rules are integrated, industry representatives who understand the intricacies of blockchain platforms need to be consulted. And this is a good approach, as regulators have previously repeatedly introduced regulations that do not fit the logic of decentralised assets.

Hester Pearce and Gary Gensler

It’s just that the Commission doesn’t want to engage with the public, Pearce pointed out. And on ambitions of total control of crypto alone, the problem will not be solved. She continues.

A year is too little time to implement everything. An extension of time would be appropriate, but even eighteen months seems like an aggressive time frame for the changes envisioned here.

Note that this is not the first time Pearce has criticised the regulator's actions. Last week, she reacted to the ban on staking on cryptocurrency exchange Kraken and a fine for the latter in the equivalent of $30 million. At the time, she said the SEC's decision was too harsh and there had been no discussion of the issue with the industry prior to it. In Hester's view, bans alone won't solve anything.

According to Decrypt’s sources, the regulator had previously published a task plan for 2023, which also included new regulations regarding cryptocurrencies. Aside from the tight deadline, the complexity of the regulator’s plan lies in the custodians themselves. Here’s a relevant rejoinder to that.

The Commission acknowledges that an agreement between a custodian and a financial adviser would be a significant departure from current practice.

Bitcoin exchange rate

Gensler’s proposal could “force investors to withdraw their assets from organisations that have already developed procedures to protect those assets”. In doing so, capital would be put at even greater risk – a hint that the established foundations on this issue are best left untouched for the time being.

Once again, the Commission is proposing to dictate regulations involving organisations that it does not regulate, which is becoming something of a habit. The agency has no power to regulate custodians directly, but we propose to regulate them indirectly. Given our lack of authority, who will be on the hook if a qualified custodian fails to meet these requirements?

As a reminder, following the publication of the new SEC rules, they were criticised by many in the cryptocurrency community. Here’s what Jake Czerwinski, chief policy officer at the Blockchain Association, wrote about it.

The Commission today proposed changes to the custodian rules that appear designed to prohibit investment in US cryptocurrency companies. The proposal would grossly violate the SEC’s mission, pushing investors into danger and discouraging capital formation.

SEC head Gary Gensler


We believe the SEC's actions do deserve criticism. In this case, the agency is simply tightening the screws and using its own powers, which is definitely not good for the local market and the blockchain industry as a whole. Obviously, in the end, it will be easier for entrepreneurs and developers to leave for other jurisdictions with clearer rules of operation. How the latter will turn out to be will become clear soon.


What do you think about it? Share your opinion in our Millionaire Crypto Chat. There we will talk about other topics that are shaping the world of digital assets in one way or another.