The Crypto Crackdown Is Just Getting Started

There was much mirth online when the US Justice Department announced the arrest of crypto exchange Bitzlato’s founder last week. Unpronounceable, unknown and unlike any of the far bigger fish (like Binance) getting headlines, Bitzlato looked like a small-fry, a nothingburger. The fact that Bitcoin resumed its march past $21,000 seemed to confirm it.

But this ignores the bigger picture. In the first few weeks of 2023, watchdogs have done a lot. On Jan. 3, a joint statement by US bank regulators warned the industry of crypto risks creeping into the banking system. Then came a $100 million settlement with Coinbase Global Inc. over weak internal controls, a lawsuit against the Winklevoss twins’ Gemini and broker Genesis for allegedly selling unregistered securities, and a $45 million settlement with lending platform Nexo (which has ceased US operations). Subpoenas are flying.

The wheels of justice turn slowly — the Gemini and Genesis complaint came too late for customers fighting to get back $900 million in trapped funds — but they’re accelerating now. Regulators like the SEC rightly feel vindicated by the past year’s events, which saw a widespread loss of faith in crypto fail to snowball into a wider economic crisis. The collapse of FTX demonstrated the industry’s failings but also the benefits of a tough regulatory line on exchanges, such as when the SEC intervened behind the scenes in 2021 to ward Coinbase off launching its own crypto-lending product. As one official put it last year, the “runway is getting shorter” for unruly platforms.

There may be plenty of debate over whether crypto tokens are more like securities, commodities, shadow banking or gambling, but the ongoing focus is to ensure crypto’s troubles don’t leak into the financial system. While legislative attempts to craft crypto rules designed to prevent another “Lehman Brothers moment” run into procedural delays and embarrassing revelations about FTX’s history of cozy ties with Capitol Hill, regulators with long memories are keeping an active eye on banks’ crypto exposure as the real risk gauge. Silvergate Capital Corp., already crushed by its exposure to FTX, seems to have gotten the message and written down the value of stablecoin assets it bought from Meta Platforms Inc.’s Diem — worth almost $200 million at the time — to basically nothing.