Behind the SEC’s Triumphant 2023: Analyzing the Agency’s Latest Enforcement Report By Richard Reinhardt, Merkle Science Lead Investigator

On November 14, 2023, the Securities and Exchange Commission released its 2023 Enforcement Report, which details enforcement actions that advance its mandate of protecting investors and maintaining fair markets. 

As one might glean from the headlines, 2023 was a banner year for the agency. Its high-profile cases against the likes of Terraform Labs founder Do Kwon and FTX CEO Sam Bankman-Fried, however, were only the tip of the iceberg. The fiscal year 2023 was a monumental success for the SEC by numerous measures: The SEC filed 784 enforcement actions in 2023,  including 501 new actions, an 8 percent increase from 2022. The SEC obtained orders for US$4.949 billion in financial remedies such as disgorgement, prejudgement interest, and civil penalties, which is second only to the high achieved in the previous year. More importantly, the SEC distributed US$930 million to affected investors.

While the SEC rightfully deserves credit, it is also important to look past the impressive figures for trends that are shaping both the financial sector in general and cryptocurrency in particular.

• The regulator as a collaborator - Although the SEC is a regulator, the agency is not taking the hands-off, hardline stance common to other similar institutions. Instead, it has adopted a highly collaborative approach. When firms self-police and proactively report any potential securities violations, and then cooperate with the SEC and address the oversight or wrongdoing, the agency rewards the errant enterprise. Most often this reward comes in the form of impunity or reduced punishment. For example, the SEC did not file a case against GTT Communications, which had taken the initiative to report its failure to provide material related to an operating income increase. At a time when financial issues are peaking, other regulators would be well-served in also adopting similar incentives for cooperation.
• A culture of going against the culture - Financial wrongdoings often continue unabated due to groupthink. While a person may know a behavior is wrong, they instead choose to go along with what others are doing. But more and more employees are speaking out. The SEC received 40,000 tips, complaints, and referrals in total, of which more than 18,000 came directly from whistleblowers. The volume of whistleblower tips is an all-time high for SEC’s Whistleblower Program, besting the 12,300 tips received in 2022. These whistleblowers were awarded US$600 million in rewards. These rewards were based on the Dodd-Frank Wall Street Reform and Consumer Protection Act, which went into effect on July 22, 2010. The act set forth a reward between 10% and 30% of total monetary collections in any enforcement action initiated by whistleblower information. The act also included a Dodd-Frank whistleblower protection rule, which aimed to protect whistleblowers from employer retribution, such as discrimination. The  SEC took action against firms that tried to infringe on whistleblower rights through agreements that violated the Dodd-Frank whistleblower protection rule. D. E. Shaw, an investment firm, was ordered to pay a US$10 million civil penalty for forcing employees to sign agreements that they could not provide confidential information to third parties, and that they did not file any complaints to government agencies during offboarding. The SEC charged other firms for violating the Dodd-Frank whistleblower protection rule with agreements that waived the right to financial whistleblower rewards or forced them to report any information requests from the SEC. Other regulators should model their program after the SEC’s Whistleblower Program, which not only offers financial incentives for whistleblowers to step forward but also legal protection when they do. 
• The inherent conflict of crypto exchanges - In traditional financial markets, services such as exchange, broker-dealer, and custodial and clearing functions are typically offered by different parties. In cryptocurrency, these functions are commonly integrated within a single exchange, which the SEC argues creates an inherent conflict of interest. As a result, the SEC alleged noncompliance with several popular exchanges, including Beaxy, Bittrex, Coinbase, and most tellingly, Binance. On November 21, 2023, Binance and CEO Changpeng Zhao pleaded guilty to charges related to anti-money laundering and breaching international financial sanctions. As part of the deal struck with federal authorities, including the SEC, Binance will pay US$4.3 billion in fines and Zhao will step down as CEO and face criminal sentencing in February 2024. The successful case against Binance shows that SEC’s complaints are more than just saber-rattling: The hammer could likewise fall on other non-compliant exchanges in the near future. 
• Targeting the entire crypto ecosystem - Although a new crypto regime may be forthcoming, the SEC is still taking action against businesses in the cryptocurrency space with a simple premise: Digital assets are unregulated securities. Because securities are not regulated like traditional financial assets, consumers lack access to regular information disclosures through which they can make an informed decision on whether to invest. Under this premise, the SEC is tackling a broad range of stakeholders. At the very top of this funnel, the SEC charged influencers and celebrities who promoted crypto asset securities without disclosing they were paid to do so. The list includes Paul Pierce, Kim Kardashian, Lindsay Lohan, Jake Paul, Kendra Lust, Lil Yachty, Ne-Yo, Akon, Soulja Boy, and Austin Mahone. All of these influencers settled with the SEC - with penalties as high as US$1.35 million for Paul Pierce - except Soulja Boy and Mahone. At the next level, the SEC targeted companies that offered unregistered securities. This included companies that offered digital assets via lending or staking, such as Genesis, Celsius, Kraken, and Nexo. The latter two already had to pay a combined US$52.5 in penalties. The SEC also brought enforcement action upon what it called crypto intermediaries, including Beaxy, Bittrex, Binance, and Coinbase. Though the charges varied between the exchanges - Binance had additional charges relating to misrepresenting trading controls, for example - all were accused of operating unregistered securities exchanges, brokers, and clearing agencies. These allegations were particularly egregious because these functions were segregated in traditional financial markets, but these exchanges were offering them from a single company, all on an unregistered basis. Finally, the SEC also pursued enforcement action against non-fungible token issuers Impact Theory LLC and Stoner Cats 2 LLC for offering unregistered securities in the form of NFTs. The SEC maintained that both companies positioned the NFTs as an investment vehicle for investors. Both companies agreed to a cease-and-desist order and fines - US$6.1 million in disgorgement, prejudgement interest, and civil penalties for Impact Theory and US$1 million for Stoner Cats. Seeking action against ecosystem players for their respective roles in bringing unregistered securities to market shows that the SEC is taking an absolute stance on crypto: It does not view digital assets as existing in a legal gray area but as an age-old financial abuse upon retail investors in a slightly different form. 
• Ending the blind eye toward compliance -  One of the SEC’s most stringent penalties was against Danske Bank. The Estonian firm was hit with a US$178.6 million civil penalty for its failure in anti-money laundering compliance. The bank had risk management, KYC, and AML procedures that were not followed and did not catch high-risk customers who moved funds through the US and other countries that it should have identified. This enforcement action shows that the SEC will hold lax parties accountable across the financial ecosystem, and cryptocurrency is no exception (one of the charges brought on Binance related to its anti-money-laundering failure). Fortunately, like banks, crypto exchanges can now tap solutions that quickly shore up their risk management, KYC, and AML procedures. This blockchain analytics tools screen and monitor wallets and transactions in real-time and bucket them into different categories, each based on behavior-based rules that organizations can customize to their own risk appetite. From a business perspective, these tools are a high-leverage investment, sparing crypto firms the financial penalties, regulator scrutiny, and operational hassle of addressing failure in anti-money laundering compliance. 

In a transformative year outlined by the SEC's 2023 Enforcement Report, the SEC is successfully cracking down on fraud and other financial crimes by collaborating closely with industry partners and select whistleblowers. Crypto is an increasingly common theme in these cases. The SEC’s treatment of digital assets as unregistered securities, and its cases against a number of prominent exchanges, NFT issuers, and other businesses, may come across as an overly draconian stance toward the industry. But the truth is somewhere in between These actions ultimately enforce investor protection, fairness, and transparency.