Cryptocurrency has exploded in popularity over the last decade, evolving from a niche technology into a multi-trillion-dollar market. However, with this rapid growth, there has also been increasing concern about fraud, security risks, and financial crimes.
As a result, regulators are stepping in to impose new rules aimed at making the crypto industry safer and more transparent.
Two of the most significant regulatory bodies in the United States—the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA)—are at the forefront of these changes.
So, what’s changing, and what does it mean for investors and businesses? Let’s break it down.
Why Are Crypto Regulations Changing?
For years, cryptocurrency has operated in a legal gray area, largely free from the strict regulations that govern traditional financial markets. While this has fueled innovation and economic opportunities, it has also led to several serious issues:
The Rise of Scams and Fraud
The cryptocurrency market has created new opportunities for investors, but it has also become a hotspot for scams and fraud. Without strong regulations, bad actors have taken advantage of unsuspecting investors.
Author: Gustavo Dolfino
Here’s how:
1. Rug Pulls
Developers create a crypto project, attract investors, and then suddenly abandon it; disappearing with all the funds. This has cost investors billions.
2. Fake ICOs & Token Scams
Scammers promote a new coin with false promises, get people to invest, and then vanish. Many tokens never had real value to begin with.
3. Phishing & Hacking
Hackers trick users into giving away private keys or gain access to crypto wallets, stealing digital assets that can’t be recovered.
Regulations aim to reduce these risks, but for now, investors must stay vigilant.
Extreme Market Volatility
Cryptocurrency markets are known for their wild price swings. Unlike stocks, which have regulations to prevent extreme fluctuations, crypto prices can skyrocket or crash within hours.
This volatility is caused by several factors:
1. Speculative Trading
Many investors buy crypto based on hype rather than real value. A sudden rush of buyers can send prices soaring, while panic selling causes dramatic crashes.
2. Lack of Regulation
Without clear regulations, market manipulation is common. Large investors, known as “whales,” can influence prices by buying or selling in bulk.
3. Global Events & News
A tweet from a billionaire or government crackdown on crypto can trigger massive price shifts overnight.
While volatility creates opportunities, it also increases risk; making regulations crucial for market stability.
Criminal Activity & Money Laundering
Cryptocurrency offers privacy and fast transactions, but these same benefits make it attractive to criminals.
Without strong oversight, bad actors use crypto for illegal activities, including:
1. Money Laundering
Criminals move dirty money through crypto exchanges to hide its origin. By converting stolen or illegal funds into digital assets, they make it harder to trace transactions.
2. Ransomware Attacks
Hackers demand ransom payments in Bitcoin or other cryptocurrencies because they can receive the money without revealing their identity. Many cyberattacks target businesses, hospitals, and government institutions.
3. Dark Web Transactions
Illegal goods, drugs, and weapons are often bought with crypto on hidden marketplaces. Without proper regulations, these platforms continue to operate.
Regulatory bodies like the SEC and FINRA aim to prevent these crimes by enforcing stricter monitoring and requiring better identity verification on crypto platforms.
Lack of Investor Protection
Unlike traditional financial markets, cryptocurrency lacks strong investor protections. In stocks, government agencies like the SEC enforce rules to prevent fraud and protect consumers.
But in crypto, many investors face risks with little legal recourse.
1. No Insurance or Refunds
If a bank fails, the government protects customer deposits. But if a crypto exchange is hacked or collapses, investors often lose everything with no way to recover their funds.
2. Scams & Fake Projects
Many new crypto projects launch without proper oversight. Fraudsters can create fake tokens, raise money from investors, and disappear.
3. Exchange Failures & Bankruptcies
Crypto platforms like FTX collapsed, leaving users stranded. Without regulations, investors have no safety net.
Regulators like SEC and FINRA aim to introduce protections to reduce these risks.
These concerns have led SEC and FINRA to take a tougher stance on crypto regulation, aiming to introduce clearer guidelines that protect investors while allowing innovation to continue.
How the SEC Plans to Regulate Crypto
The Securities and Exchange Commission (SEC), led by Chairman Gary Gensler, has made it clear that many cryptocurrencies should be treated as securities under federal law. This means they would be subject to the same rules as stocks, requiring registration and compliance with strict reporting standards.
Here’s what the SEC is focusing on:
1. Classifying More Cryptocurrencies as Securities
The SEC believes that most cryptocurrencies meet the Howey Test, a legal standard that determines whether an asset qualifies as a security. If an investment involves:
- An expectation of profits
- Derived from the efforts of others
- Based on a common enterprise
…then it is considered a security.
Many tokens, particularly those launched through ICOs or token sales, fit this definition. If the SEC enforces this classification, crypto projects may need to register and follow strict disclosure rules, making it harder for new coins to launch without legal approval.
2. Stricter Regulation of Crypto Exchanges
Right now, major crypto exchanges like Coinbase, Binance, and Kraken operate without the same level of oversight as stock exchanges. The SEC wants to change this by requiring these platforms to register as securities exchanges.
If this happens, crypto exchanges would have to:
- Follow strict compliance rules like traditional stock markets
- Improve fraud prevention measures to stop market manipulation
- Increase transparency by providing detailed financial disclosures
This could make trading safer for investors but may also increase operational costs for exchanges.
3. Cracking Down on Crypto Lending & Staking
Crypto lending platforms allow users to earn interest on their crypto holdings, similar to a savings account. However, platforms like BlockFi and Celsius have been accused of selling unregistered securities without investor protections.
The SEC is taking legal action against companies that fail to comply. Moving forward, crypto lending and staking services may face tighter restrictions, potentially making it harder for users to earn passive income from their holdings.
FINRA’s Role in Crypto Regulation
While the SEC focuses on classifying and regulating cryptocurrencies, FINRA (Financial Industry Regulatory Authority) is responsible for overseeing crypto brokers, investment advisors, and market practices.
Here’s how FINRA is stepping in:
1. Licensing & Regulation for Crypto Brokers
Right now, almost anyone can claim to be a crypto investment advisor. FINRA is working to require licensing and training for brokers who offer crypto-related financial services.
This will ensure that:
- Only qualified professionals can advise on crypto investments
- Investors receive clear and accurate information before making decisions
- Brokers follow ethical trading practices and avoid conflicts of interest
2. Preventing Market Manipulation
Market manipulation is a major issue in crypto, with pump-and-dump schemes and wash trading artificially inflating prices. FINRA is developing rules to detect and prevent fraudulent trading practices, ensuring fairer markets for investors.
3. More Transparency & Investor Education
Many investors don’t fully understand the risks of crypto investments. FINRA wants to require brokers and firms to disclose potential risks more clearly, helping people make more informed decisions before investing.
How Will These Changes Affect Crypto Investors?
New regulations will bring both benefits and challenges for investors and businesses in the crypto industry.
Potential Benefits of Regulation
✅ Increased Investor Protection: With clearer rules, scams and fraud may decrease.
✅ More Stability: Less market manipulation could reduce extreme volatility.
✅ Encouraging Institutional Investment: More regulation could attract banks and large firms, boosting long-term adoption.
Potential Downsides of Regulation
❌ Increased Restrictions: Some projects may struggle to comply with regulations, slowing innovation.
❌ Higher Costs for Exchanges: More compliance requirements mean increased expenses, which could lead to higher trading fees.
❌ Less Anonymity: Regulations may require more user verification, reducing privacy for crypto users.
Despite these challenges, regulation is not necessarily bad for the industry. Many experts believe that clearer rules will ultimately strengthen the crypto market, making it safer and more legitimate in the eyes of traditional investors.
What’s Next for Crypto?
As regulators continue to develop new policies, here’s what we can expect:
- Bitcoin & Ethereum will likely remain dominant, as they are less likely to be classified as securities.
- Stablecoins (like USDT & USDC) will face stricter regulation, ensuring they are backed by real assets.
- DeFi platforms will need to adapt, with increased scrutiny on decentralized finance applications.
- NFTs may also be subject to regulation, especially those used as investment vehicles.
Big financial institutions like BlackRock, Fidelity, and JPMorgan are already entering the crypto space, showing that institutional adoption is increasing despite regulation.
Final Thoughts
The crypto industry is at a turning point. SEC and FINRA are pushing for stricter regulations to reduce fraud, increase transparency, and protect investors.
While these changes may limit some aspects of the crypto market, they could also create a more stable and trustworthy environment for long-term growth.
If you’re a crypto investor, staying informed and understanding these regulations will be key to navigating the future of digital assets.
One thing is certain; crypto is here to stay, but it won’t remain the same. Adaptation is the name of the game.
What do you think about these regulatory changes? Let’s discuss in the comments! 🚀
About the Author:
Gustavo Dolfino is an accomplished Senior Executive who has worked in complex financial business strategies for a number of clients, both small and large. He has extensive experience with capital markets and corporate finance. His experience includes having provided a range of equity-related financing services through his extensive network of relationships with commercial banks, insurance companies, private equity, and hedge funds. Dolfino has a solid background in business model analysis, mergers and acquisitions, capital markets financing solutions a well as capital raising.
“I am a self-made man and attribute my business achievements to my strong work ethic. I enjoy a challenge and have succeeded in numerous industries, including finance, investment, pharmaceuticals, banking, and higher education.”