Column: The legal system is closing in on crypto, and things may only get worse

A man holds a screening device over the head of another man in a courtroom.
Crypto fraudster Sam Bankman-Fried is screened in a New York courtroom as he prepared to face charges related to the collapse of his FTX crypto exchange. He was sentenced to 25 years in prison last month.
(Michael M. Santiago / Getty Images)

Forget what T.S. Eliot said about April. For the crypto community and its related scamsters, the cruelest month was March.

That month saw a string of jury verdicts and judicial rulings that laid bare the dark underside of cryptocurrency trading, reinforcing its reputation as a haven for fraud and other illegality. The terrain hasn’t proved any more inviting in April thus far, as regulatory investigations and judicial rulings continue to rock the asset class and its promoters back on their heels.

From the standpoint of ordinary investors and the economy as a whole, this is all good. As I’ve written before, the value of crypto tokens, from bitcoin down to the jokiest versions such as dogecoin, is so nebulous that they lend themselves to schemes aimed at separating unwary or gullible investors from their (real) money.


The ‘crypto’ nomenclature may be of recent vintage, but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years.

— U.S. Judge Katherine Polk Failla

The value of cryptocurrencies can be placed anywhere. They don’t produce income like bonds, and their prices can’t be pegged to liquid markets like those of public company securities. To this day, no one has ever explained what cryptocurrencies are useful for, other than paying ransom to crooks holding databases or computer systems hostage.

As recently as Monday, Change Healthcare, a medical transactions processor owned by United Health Group, received a second demand for a ransom payable in crypto tokens only weeks after paying a reported $22-million ransom to rescue personal information, including payment data and medical records for thousands of patients.

That hack of Change’s database disrupted healthcare claims payments nationwide, even forcing some medical providers to lay off workers or shut down entirely for lack of funds.

The new demand apparently came from a ransomware group that feels it has been cheated by its partners in the first demand, who may have absconded with the original payoff. If there’s no honor among thieves, as the adage says, that goes double in crypto. No, not double — squared.


Let’s take a look at crypto’s March Madness before moving on to April.

The highest-profile blow, of course, was the March 28 sentencing of convicted crypto fraudster Sam Bankman-Fried for his conviction in October on seven fraud counts related to the collapse of his FTX crypto exchange.

Federal Judge Lewis Kaplan sentenced Bankman-Fried to a 25-year prison term and ordered him to forfeit more than $11 billion. Kaplan observed that Bankman-Fried had scarcely expressed remorse for his crimes. Kaplan justified the lengthy term by observing from the bench that otherwise Bankman-Fried would “be in a position to do something very bad in the future, and it’s not a trivial risk.”

That’s not all. The day before Bankman-Fried’s sentencing, federal Judge Katherine Polk Failla issued a ruling that may have a more far-reaching effect on the crypto business. Failla cleared the Securities and Exchange Commission to proceed with its lawsuit alleging that the giant crypto broker and exchange Coinbase has been dealing in securities without a license.

Vanguard has a long history of denying its customers access to investments it believes are dumb. Now it has added crypto to the list.

Feb. 27, 2024

What’s important about Failla’s ruling is that she dismissed out of hand Coinbase’s argument, which is that cryptocurrencies are novel assets that don’t fall within the SEC’s jurisdiction — in short, they’re not “securities.”

Crypto promoters have been making the same argument in court and the halls of Congress, where they’re urging that the lawmakers craft an entirely new regulatory structure for crypto — preferably one less rigorous than the existing rules and regulations promulgated by the SEC and the Commodity Futures Trading Commission.

As it happens, Bankman-Fried made the same pitch in his appearances before congressional committees, back in the day when he was viewed as the last seemingly honest crypto promoter, before it was discovered that he had illegally appropriated his customers’ holdings to fund his and FTX’s own investment ventures.


Failla saw through that argument without breaking a sweat. “The ‘crypto’ nomenclature may be of recent vintage,” she wrote, “but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years.”

Failla also took a swipe at the crypto gang’s amour-propre, rejecting Coinbase’s argument that the case should fall within the “major questions doctrine,” an informal rule that requires regulatory initiatives to be explicitly authorized by Congress if they involve issues of “vast economic and political significance.” Since Congress hasn’t enacted regulations specifically aimed at crypto, Coinbase said, the SEC’s lawsuit should be dismissed.

The judge’s opinion of that argument was withering. “While certainly sizable and important,” she wrote, “the cryptocurrency industry ‘falls far short of being a “portion of the American economy” bearing vast economic and political significance.’”

Crypto simply “cannot compare with those other industries the Supreme Court has found to trigger the major questions doctrine.” Those include the American energy industry and the conventional securities industry itself, she wrote.

The criminal convictions of Sam Bankman-Fried and the Binance gang just mark the beginning of the U.S. government’s drive to expose crypto as a tool for fraud and money-laundering. Yet some politicians are still trying to polish its reputation.

Nov. 28, 2023

Failla’s ruling followed another in New York federal court in which a judge deemed crypto to be securities.

In that case, Judge Edgardo Ramos refused to dismiss SEC charges against Gemini Trust Co., a crypto trading outfit run by Cameron and Tyler Winkelvoss, and the crypto lender Genesis Global Capital.


The SEC charged that a scheme in which Gemini pooled customers’ crypto assets and lent them to Genesis while promising the customers high interest returns is an unregistered security. The SEC case, like that against Coinbase, will proceed.

Both rulings tended to negate a 2023 ruling from federal Judge Analisa Torres of New York in an SEC enforcement action against Ripple, the developer of a crypto token known as XRP. Torres found that under some circumstances the token might not be a security. But her ruling is being buried by an onslaught of decisions by her colleagues that the crypto marketers and exchanges are dealing in unregistered securities, which is illegal.

The hangover from March continued into this month. On April 5, a federal jury in New York found Terraform Labs and its chief executive and major shareholder, Do Kwon, liable in what the SEC termed “a massive crypto fraud.”

The case involved Terraform’s so-called stablecoin UST, a crypto token that was pegged 1 to 1 with the U.S. dollar. Kwon was not in court to hear the verdict; he is in custody in the Balkan country of Montenegro while U.S. and South Korean authorities vie for his extradition.

Terraform had claimed that UST coin would automatically “self-heal” via a software algorithm if its value fell below the $1 peg. That happened in May 2021. When the coin did return to its $1 value, the SEC alleged, Terraform and Kwon bragged that the price restoration was a triumph over the “decision-making of human agents in a time of market volatility.”

In fact, the algorithm had nothing to do with it. According to testimony at the trial, which began in late March, Terraform was secretly bailed out by the trading firm Jump Trading, which may have invested tens of millions of dollars to prop up UST and emerged from the deal with a profit that may have exceeded $1 billion. Failing to disclose that arrangement to investors broke the law, the SEC said.


Kwon and Terraform also lied to the public that Chai, a South Korean financial firm akin to Venmo, was using Terraform to process transactions; in fact, Chai had ceased using Terraform in 2020, the SEC said.

These deceptions, the agency alleged, painted a picture of robust health within Terraform that came apart in May 2022, when UST again depegged from the U.S. dollar and could not be restored. The value of UST fell in effect to zero, the SEC said, “wiping out over $40 billion of total market value ... and sending shock waves through the crypto asset community.”

Terraform is now bankrupt; no charges have been brought against Jump.

These events should give American lawmakers pause as they ponder what to do, if anything, about regulating crypto. At a hearing Tuesday of the Senate Committee on Banking, Housing, and Urban Affairs, Sen. Sherrod Brown (D-Ohio), the committee chairman, warned that crypto is a potential threat to national security.

“Bad actors — from North Korea to Russia to terrorist groups like Hamas — aren’t turning to crypto because they’ve seen the ads and bought the hype,” Brown said. “They’re using it because they know it’s a workaround. They know that it’s easier to move money in the shadows without safeguards, like know-your-customer rules or suspicious transaction reporting.... We must make sure that crypto platforms play by the same rules as other financial institutions.”

Brown’s words were amplified by Deputy Treasury Secretary Wally Adeyemo, who urged Congress to enact reforms the Treasury has proposed that would strengthen sanctions on “foreign digital asset providers that facilitate illicit finance.”

On Monday, meanwhile, Sen. Elizabeth Warren (D-Mass.) — perhaps the most uncompromising foe of crypto on Capitol Hill — took aim at stablecoins by urging the House Financial Services Committee to avoid trying to write rules that would “fold stablecoins deeper into the banking sector.


Given the potential of stablecoins and their ilk to “undermine consumer protection and the safety and soundness of the banking system,” she warned, any so-called reforms “could amplify and entrench these risks rather than mitigate them.”

What is driving the interest of politicians in promoting an asset class that hasn’t shown any value except where fraud or theft is involved? As is so often the case, it’s money — the green, foldable kind.

Crypto promoters have been stepping up their lobbying in Washington; crypto firms spent nearly $20 million on lobbying in the first nine months of 2023, according to the watchdog group Open Secrets.

As a push for a new regulatory approach, especially among House Republicans, dovetails with an election year, much more spending would appear to be in the offing. It’s a win-win-lose situation, with politicians and crypto promoters poised to win, and ordinary investors as well as the economy as a whole poised to lose.