Could Operation Choke Point 2.0 and the SEC’s focus on OpenSea and Custody corner the cryptocurrency industry?
<h2 class="wp-block-heading" id="sec-strikes-the-crypto-industry-again”>SEC attacks cryptocurrency industry again…
As the United States approaches the upcoming presidential election, the cryptocurrency industry once again finds itself at a crossroads.
With many viewing Democratic candidate Kamala Harris as a potential ally, the current administration, led by SEC Chairman Gary Gensler (appointed by President Joe Biden), has stepped up its regulatory actions and now has its sights set on the non-fungible token market.
On August 28, the SEC issued a Wells Notice to OpenSea, the largest nft marketplace, signaling its intention to take enforcement action against the platform.
A Wells Notice is a formal communication from the SEC indicating that the agency is considering taking enforcement action against a company or individual and providing them with an opportunity to respond before a final decision is made.
According to OpenSea CEO Devin Finzer, the SEC is claiming that certain nfts on the platform can be classified as securities, a claim that could have serious repercussions for the entire nft space.
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This announcement came just a day after former President Donald Trump, who has positioned himself as pro-cryptocurrencies, launched his fourth collection of nft digital collectible cards, which included unique benefits like pieces of his debate suit and exclusive experiences at Trump National Golf Club.
OpenSea is not the only company facing SEC scrutiny. In April, decentralized exchange Uniswap (UNI) also received a notice from Wells, in which the SEC alleged that it was operating as an unregistered securities dealer.
Other major players such as Coinbase, Kraken and Robinhood have faced similar actions in the past.
These moves indicate that Operation Choke Point 2.0, believed to be a Biden administration strategy to cut the cryptocurrency industry’s ties with traditional banking services, is still in full effect. What’s really going on?
Dissecting the OpenSea saga
In his tweet, Finzer expressed deep concern about the SEC’s approach, describing it as a “sweeping crackdown on creators and artists.”
According to Finzer, the SEC alleges that the sale of nfts on OpenSea violated securities laws because nfts are considered securities and those transactions constituted unregistered securities sales.
The CEO noted that such a move could stifle innovation in the nft space, potentially affecting hundreds of thousands of artists and creatives online. The central point of Finzer’s argument is that nfts are fundamentally different from financial securities.
Finzer said that “nfts are fundamentally creative goods: art, collectibles, video game items, domain names, event tickets, and more,” arguing that they should not be regulated in the same way as traditional financial instruments.
OpenSea refutes the regulator’s allegations, saying they do not apply and that the platform is “ready to stand up and fight.”
From student artists finding full-time careers selling their digital art to independent game developers creating open marketplaces for their in-game items, nfts have enabled new opportunities that would be at risk if the SEC’s actions continue unchecked.
As Finzer mentioned, “it would be a terrible outcome if creators stopped making digital art because of regulatory threats.”
Finzer also drew attention to ongoing legal battles that reflect OpenSea’s plight. He referenced the lawsuit filed against the SEC by musician Jonathan Mann and conceptual artist Brian Frye, who feared that the sale of their art and music could be classified as unregistered securities offerings.
To combat the SEC’s latest move, OpenSea has pledged $5 million to support nft creators and developers who may find themselves in similar legal battles.
Regulatory ambiguity around nfts
When it comes to nfts in the United States, the regulatory environment is still confusing. This lack of clear rules has created confusion and uncertainty, not only for creators and buyers, but also for the platforms that facilitate nft transactions.
Currently, there is no specific law in the US that regulates nfts. Instead, regulators like the SEC try to fit nfts into existing laws, which were primarily designed for traditional financial products.
The big question regulators are asking is: Are nfts securities? If they are, they would be subject to strict SEC regulations, similar to stocks or bonds. But here’s where things get complicated.
Under the Howey test, a legal standard used by the SEC to determine whether something is a security, an asset is considered a security if it involves an investment of money in a common enterprise with an expectation of profits derived from the efforts of others.
This test was originally designed for traditional investments, but now the SEC is… applying These are nfts, which are often purchased for reasons other than profit, such as collecting or supporting an artist.
The main problem with applying existing regulations to nfts is that they do not take into account the diversity and complexity of the market.
nfts can represent anything from digital art to gaming items, each with their own characteristics and value proposition. Applying a one-size-fits-all regulatory approach could stifle innovation and limit the potential of nfts.
For example, if all nfts were classified as securities, platforms would have to comply with the same regulations as stock exchanges, which could prove incredibly costly and complicated.
Smaller creators and developers may find it impossible to meet these requirements, potentially pricing them out of the market altogether. This could limit the diversity and creativity that have made nfts so popular.
There is also a global aspect to consider. The United States is only one part of the global nft market, and overregulation in that country could drive nft activities to other countries with more favorable regulations.
The SEC’s recent actions, including Wells’ notice to OpenSea, indicate a more aggressive approach to regulating the nft space. By potentially classifying certain nfts as securities, the SEC is attempting to expand its regulatory reach, which could increase costs for users and reduce the number of new nfts entering the market.
Domino effects throughout the industry
The ongoing crackdown under Operation Choke Point 2.0 is sending shockwaves not only through the nft market but across the entire cryptocurrency industry.
A clear example of this is the recent restructuring of Custodia Bank, a small but influential Wyoming-based financial institution that serves cryptocurrency companies.
Custodia Bank, once a key provider of banking services to cryptocurrency companies, recently announced the layoff of nine of its 36 employees, as crypto-crackdown-weighs-digital-asset-industry” target=”_blank” rel=””>reported By Fox Business The difficult decision was made to preserve capital while the bank battles the Federal Reserve in court.
At the heart of the legal battle is Custody's pursuit of a master account at the Federal Reserve, a crucial asset that would grant the bank access to the central bank's liquidity facilities and payment services.
Without this account, Custodia is forced to operate through other institutions that do have master accounts, which generates much higher operating costs.
Banking regulators have become increasingly wary of allowing traditional banks to interact with cryptocurrency companies. This increased scrutiny has made many traditional banks hesitant to maintain relationships with cryptocurrency companies, contributing to a growing sense of isolation within the industry.
Despite assurances from government officials, including Treasury Deputy Secretary Wally Adeyemo, that there is no coordinated effort to exclude the cryptocurrency industry from the broader financial system, the experiences of industry participants suggest otherwise.
Custodia Bank itself has faced this harsh reality: two of its partner institutions have terminated their relationships, leaving it even more vulnerable in its struggle to survive.
The Operation Choke Point 2.0 crackdown reflects the real-life impact of regulatory pressure on the cryptocurrency industry. Even a small, state-authorized bank like Custodia, which plays a critical role for businesses lacking other banking options, is struggling to stay afloat.
The SEC’s recent move against OpenSea has sparked a wave of frustration and anger on social media, with many users expressing disbelief and concern over what they perceive as an authoritarian approach to regulating the nft market.
One of the angriest critics highlighted the absurdity of labeling nfts as securities. The user questioned whether the SEC would also start classifying “paintings” or “Beanie Babies” as securities, sarcastically asking if “eBay” could be next on the SEC’s list.
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Another user expressed disbelief at the SEC's continued actions against the cryptocurrency industry and lamented the agency's moves as a direct attack on innovation.
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The frustration is not limited to the SEC's actions, but extends to the political sphere as well. One user even expressed disappointment with the Democratic Party.
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Drawing a historical parallel, another user pointed out that in 1976, the SEC ruled that art galleries did not need to register as securities dealers, even when they promoted and sold art as investments.
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The tweet ironically points out the inconsistency in the SEC’s stance, suggesting that while “galleries” were considered acceptable, “nft marketplaces” are not.
The growing chorus of voices on social media reflects a deepening divide between the crypto community and regulatory bodies like the SEC.
As these discussions continue, the debate over how to regulate digital assets is far from over, with many in the industry calling for more clarity and fairness.
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