By Annie Cerria

Since its inception, cryptocurrency has been famously volatile, with Investopedia putting it bluntly: “If you’re looking to use [crypto] to preserve capital or grow your assets, its price is highly volatile—there is no guarantee that you will see any returns; you’re just as likely to lose everything you invest as you are to make any gains.”

However controversial or disdained it may be, there is no denying that cryptocurrency has come to represent a massive area of the global economy, particularly in the United States, where trading and investing in digital currencies has been booming since 2021. Since the beginning of the summer of 2022, however, the cryptocurrency market has been dominated by various crashes, frauds, Ponzi schemes and criminal indictments. This past June, during the so-called “Crypto Crash,” the overall digital currency market took a nose-dive of epic proportions, slashing the entire value of the market by more than half. As New York Magazine described in an analysis: “The crypto market is bleeding out. The total market for all digital currencies the world over fell below $1 trillion… down from $3 trillion last fall and the lowest point for the market since February 2021… throw a dart at a list of digital tokens and you’ll likely see a double-digit loss in just 24 hours.”

While many crypto stalwarts dismissed this as a routine volatility period for the digital currency market (arguing that crashes like this ultimately strengthen markets), the crash hit many Americans very hard, mostly individuals who had been sold a promise of major financial gains from even small investments in cryptocurrency. The market’s downturn delivered the exact opposite to the majority, with the FTC reporting that the median loss for individuals on cryptocurrency investments during this period was a staggering $2,600, with overall losses from June 2021-2022 being sixty times higher than they were in 2018. Massive amounts of money being lost in what was essentially a 24-hour period was sure to not go unnoticed by regulators, and this summer’s crash finally forced the U.S. government to strengthen cryptocurrency regulations, something which they had been famously reluctant to do.

The regulations being put into place have been implemented by a variety of government agencies and cover a variety of aspects of the digital market. In a September report, the White House stated that its main goal was to protect “consumers, investors and businesses,” and that the reality of the situation is that “sellers commonly mislead consumers about digital assets’ features and expected returns, and non-compliance with applicable laws and regulations remains widespread.” This report, representing the White House’s most direct attacks on the unregulated nature of the cryptocurrency market yet, has since kicked off a flurry of government initiatives toward regulating crypto, which has, in turn, kicked off a flurry of subsequent lawsuits.

Some have been more high-profile than others: earlier this month the S.E.C. fined Kim Kardashian $1.2 million for touting the cryptocurrency EthereumMax on her social media without disclosing that she was being paid to do so. Speaking on the lawsuit, the commission’s chair Gary Gensler commented that “This case is a reminder that, when celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn’t mean that those investment products are right for all investors.” In a separate class-action lawsuit against Kardashian concerning her promotion of EthereumMax, individuals who invested in the currency after viewing her posts have alleged that the coin was a pump-and-dump scheme. In essence, alleging that Kardashian artificially inflated the value of the coin to her followers that in reality was not worth much at all.

While this lawsuit was intended to get headlines, the S.E.C. and other U.S. government agencies have been quietly putting much more stringent regulations against cryptocurrencies into place, much to the ire of large investors in the market. Last week, Grayscale Investments LLC, which manages the world’s largest Bitcoin investment fund, sued the S.E.C. over ‘special harshness’ toward Bitcoin trading, due to the agency’s rejection of a proposal from the New York Stock Exchange to convert Grayscale’s $15 billion bitcoin investment trust into an exchange-traded fund, despite the commission’s previous approval of exchange-traded funds based on bitcoin futures. The agency’s sudden reversal of a previously-upheld policy (a move which, in hindsight, was destined to provoke anger) shows just one of the ways in which the U.S. government has attempted to exert control over crypto.

Crypto has also become a major diplomatic issue for the U.S., leading to a series of arrests and sanctions from both the U.S. State Department and the Treasury. Since cryptocurrency’s initial boom, North Korea has relied on digital currency to evade global sanctions, generate income, and allegedly fund its illegal nuclear weapons program. This has prompted a strong response from both departments, including a recent one which has led to yet another major lawsuit.

Earlier this year, the Treasury Department issued sanctions against Tornado Cash, a tool that anonymises cryptocurrency exchanges. Secretary of State Antony Blinken erroneously claimed that the service was affiliated with North Korea, but later backtracked the statement, but still received swift condemnation from many crypto advocacy groups. According to the Treasury’s Office of Foreign Assets Control (OFAC), the sanctions are in response to the Lazarus Group, the North Korean hacking organisation it claims has utilised the service to steal and launder around $500 million. The sanctions are particularly unique, as they are targeting a piece of technology that is not inherently nefarious, but has been used to accomplish illegal actions. Furthermore, Tornado Cash is not an entity but a service, and thus cannot appeal the decision. 

Therefore, individuals such as crypto podcaster David Hoffman have now taken it upon themselves to sue the Treasury over the sanctions. As New York Magazine details, “It’s up to people like Hoffman, who claims he may be forced to affirm every year that he’s not a criminal — not because he has used it or has some connection to North Korea, but because he once had someone send him money using Tornado Cash.” 

Crypto advocacy group Coin Centre followed in Hoffman’s footsteps, launching their own lawsuit against the Treasury for its actions regarding Tornado Cash. Jerry Brito, the group’s executive director, explained the lawsuit in a tweet, penning that, “Not only are we fighting for privacy rights, but if this precedent is allowed to stand, OFAC could add entire protocols like Bitcoin or Ethereum to the sanctions list in future, thus immediately banning them without any public process whatsoever. This can’t go unchallenged.”

Both Hoffman and Coin Centre are alleging that the Treasury has overstepped their power with these sanctions, with Hoffman arguing that “making it a crime for Americans to use Tornado Cash because the Lazarus Group used Tornado Cash would be like making it a crime for Americans to use email because the Lazarus Group used email to further its illicit activities.” Furthermore, according to New York, Hoffman is also arguing that one facet of the sanctions penalises anyone who has even just received money from the service, which would include celebrities such as Jimmy Fallon. While the merits of this argument will ultimately be decided in court, the Treasury Department’s actions do represent a drastic step that could easily be seen as an overreach in power.

Ultimately, these lawsuits represent a dilemma for U.S. regulators. When crypto is at its unregulated worst, it has caused millions of people to lose huge amounts of money, has slashed trillions off of entire economic markets, and has encouraged celebrities like Kim Kardashian to take money to promote probable pump-and-dump schemes to their followers. American regulators have a responsibility to interfere in these situations in order to protect the interests of all investors, whether they be individual or corporate, but as these lawsuits have evidenced, they have yet to strike a balance between regulation and suppression. Agencies such as the S.E.C. or the Treasury will have to decide quickly whether they want to focus more on working with the cryptocurrency industry in their attempts to regulate it, or face a probable years-long legal war with crypto advocates and investors over every regulation. 

Whatever they choose, it seems almost fitting that the process is sure to be as volatile as the day-to-day value of Bitcoin.

The views expressed in this article are the author’s own and may not reflect the opinions of the St Andrews Economist.

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