Cryptocurrency freedom in danger? eToro's SEC settlement raises alarm

Could eToro’s settlement with the SEC be the beginning of a major shift in the way crypto assets are regulated? Will other platforms face similar measures in the near future?

SEC takes action and eToro reaches a settlement

eToro, a global cryptocurrency trading platform based in Israel, has found itself caught in a regulatory turmoil. Known for offering a variety of assets such as stocks and cryptocurrencies, the company recently agreed to a settlement with the U.S. Securities and Exchange Commission.

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The SEC says eToro allowed U.S. customers to trade certain crypto assets without registering them as securities, in violation of federal law, the regulator said.

As part of the settlement, eToro will pay a $1.5 million fine. More importantly for its US users, the platform will stop offering most cryptocurrencies.

From now on, only bitcoin (btc), bitcoin Cash (BCH) and ethereum (eth) will remain available for trading. Users will have 180 days to sell any other cryptocurrency they hold.

This deal marks a turning point for cryptocurrency traders in the US, particularly those who relied on eToro to trade a wide range of crypto assets.

While eToro neither admitted nor denied the SEC's allegations, CEO Yoni Assia conveyed the company's commitment to working with regulators to ensure compliance.

This development raises a key question: could this be the start of a broader crackdown on cryptocurrency platforms, given the SEC’s recent actions?

<h2 class="wp-block-heading" id="se-cs-crypto-crackdown”>SEC crackdown on cryptocurrencies

Under Chairman Gary Gensler, the SEC has stepped up its scrutiny of the cryptocurrency world, launching case after case against companies in the sector.

Gensler, who took over in early 2021, has made it clear that he believes most cryptocurrencies are actually securities. And that's where the problems begin.

Since the collapse of major players like Terraform Labs and FTX in 2022, the SEC has become even more aggressive in its approach.

From centralized exchanges like Coinbase, Binance, Kraken, and Robinhood to decentralized finance projects and now even nfts, almost no corner of the cryptocurrency industry has been left untouched.

Take OpenSea, the largest nft marketplace, for example. On August 28, it received a Wells Notice from the SEC, which is essentially a formal warning that the agency is considering taking enforcement action.

The SEC believes that some nfts sold on the platform could actually be securities. If the SEC follows through, it could mean big changes to the way nfts are traded and viewed in the US.

OpenSea isn’t the only platform in the SEC’s crosshairs. In April, Uniswap (UNI), a decentralized exchange, also received a notice from Wells.

Like eToro, the SEC alleged that Uniswap was acting as an unregistered broker. If these projects are forced to change the way they operate, it could send shockwaves throughout the crypto space, affecting how people trade and invest in decentralized tokens.

Some industry experts believe these actions are part of a broader government strategy called “Operation Choke Point 2.0.”

The idea behind this is that the US government is trying to cut off the cryptocurrency industry's access to traditional banking services, making it harder for businesses to operate.

At the heart of the SEC’s enforcement efforts is the question of how cryptocurrencies should be regulated. Gensler has been steadfast in his stance that most cryptocurrencies are securities, meaning they should be subject to the same rules as stocks and bonds.

One notable exception, however, is bitcoin. Previous regulators agreed that bitcoin is decentralized enough to avoid being classified as a security and is instead considered a commodity.

Meanwhile, ethereum has gained more clarity in recent months. While it has long existed in a grey area, the approval of spot ethereum ETFs in July 2024 further cements its status as not being a security.

Furthermore, eToro’s decision to continue offering ethereum to US users, alongside bitcoin and bitcoin Cash, aligns with this view, indicating that the SEC may be coming to terms with ethereum’s regulatory status.

Expert reactions and public protests

The news of eToro's settlement with the SEC has sparked a wide debate. From legal experts to crypto enthusiasts, everyone has an opinion on what this means for the future of cryptocurrencies in the United States.

Drew Hinkes, a professor at New York's Stern University and an expert on crypto law, expressed a mix of concern and confusion about the SEC's handling of the case.

According to him, the settlement left several key questions unanswered. In particular, Hinkes noted that the SEC did not specify which of the digital assets offered by eToro were considered securities.

“We’re still guessing what assets the SEC considers to be and are not ‘securities,’” he said, highlighting the uncertainty this creates for the market. This ambiguity leaves token projects once listed on eToro in what he called a “regulatory purgatory.”

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Hinkes also mentioned a major contradiction in the settlement. While the SEC ruled that eToro violated securities laws, it did not provide a clear path forward for companies seeking to comply.

“The SEC is not helping market participants,” he said, referring to the lack of specific guidance on how companies should approach compliance with securities laws.

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Instead, the settlement stipulates that eToro must sell the tokens on behalf of users in a manner approved by the SEC, a move that raises more questions than answers about how the agency will handle such cases in the future.

Bill Hughes, a lawyer for Consensys, took a more pragmatic stance, noting that the $1.5 million fine was small compared to the size of eToro's US user base.

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According to Hughes, eToro had around 240,000 customer accounts in the US, a drop in the ocean compared to Coinbase's 100 million users. He called the deal more of an “exit fee” than a harsh punishment.

The deal has also sparked heated reactions in the cryptocurrency community. Many retail investors and crypto enthusiasts feel that the SEC’s enforcement actions are stifling innovation rather than protecting consumers.

One x user bluntly accused the SEC of harming the very people it claims to protect. “They have protected no one. They have reduced retail customer access. They have attacked a legitimate American company,” he tweeted, expressing frustration at what he saw as agency overreach.

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Similar sentiments were echoed on social media, with another user arguing that the SEC's approach makes it impossible for companies to comply because the regulatory framework is unclear.

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While the eToro settlement is just the latest in a series of enforcement actions, it raises concerns about how the SEC plans to regulate the cryptocurrency industry going forward.

Now that OpenSea and Uniswap have also received notices from Wells, it is clear that the SEC is not done with its crackdown on crypto projects. But whether this will lead to clearer rules or simply innovation moving overseas remains an open question.