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The U.S. Securities and Exchange Commission is preparing to sue the company behind TerraUSD, a crypto stablecoin whose collapse last year kicked off an industry wide crisis and a cascade of high-profile bankruptcies, Bloomberg News reported. The SEC has been investigating whether Terraform Labs, the company behind the token, misled investors about the stablecoin’s ability to maintain a 1-to-1 peg to the U.S. dollar, according to people familiar with the matter. The lawsuit will allege that TerraUSD should have been registered with the agency, said one of the people, who like the others asked not to be named discussing the plans. “Terraform Labs has not been contacted about such a proceeding by the SEC and thus cannot comment,” the company said in a statement. The SEC declined to comment. Although the case is in its final stages, timing and plans could change. TerraUSD, or UST, was supposed to maintain its peg through an algorithm and trading in a sister token called Luna — an experiment that failed spectacularly when the stablecoin crashed last May, sparking a massive selloff. The token’s implosion kicked off a domino effect across crypto markets. It directly, or indirectly, fueled bankruptcies in high-profile companies, including hedge fund Three Arrows Capital, Voyager Digital, and, most prominently, Sam Bankman-Fried’s Alameda Research and FTX.

Crypto platforms could soon face a new set of hurdles to hold digital assets owned by clients of hedge funds and private equity firms in the U.S., Bloomberg News reported. The Securities and Exchange Commission on Wednesday proposed expanding its “qualified custodian” requirements to cover a range of assets, including virtual currencies. The broad changes to those long-standing rules might hit the crypto industry particularly hard as it continues to reel from a regulatory crackdown. Watchdog concerns over the safety of investors’ tokens held by crypto platforms was heightened after a series of meltdowns last year, including FTX’s wipeout in November. The SEC’s plan would require that custodians give assurances that money-manager client assets are properly segregated and protected in the event of bankruptcy, or insolvency, as a condition of being able to hold them. “Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians,” SEC Chair Gary Gensler said in a statement. He added that crypto exchanges that co-mingle custodial services with other business activities already prevents them from qualifying as custodians for investment advisers under existing rules. Read more.

In related news, banks are backing away from crypto companies, spooked by a regulatory crackdown that threatens to sever digital currencies from the real-world financial system, the Wall Street Journal reported. Banking regulators are raising concerns about banks’ involvement with crypto clients following last year’s blowup of Sam Bankman-Fried’s FTX. The Securities and Exchange Commission is aggressively pursuing the industry’s bigger players in a crackdown that threatens to narrow their reach. That move has alarmed bankers who don’t want to do business with customers in the SEC’s crosshairs, people familiar with the matter said. Now bankers are re-evaluating any exposure to the crypto sector, no matter how small, according to people familiar with their thinking. The few smaller banks that got deep into crypto are reducing their exposure to the market or cutting ties altogether. Banks that kept their distance from crypto are trying even harder to stay away, closing accounts and shunning customers with potential connections to the industry. Read more. (Subscription required.)

The walls are closing in around crypto. Regulators hadn’t taken action against many of the industry’s biggest players, but are now cutting off access to products and services central to the digital-currency business, the Wall Street Journal reported. On Monday, New York regulators shut down new issuance of the world’s third-largest stablecoin, BUSD, prompting investors to flee the coin and raising worries about the future of crypto exchange giant Binance, which gives the coin the “B” in its name. Binance’s partner in issuing the coin, Paxos Trust Co., is facing a potential Securities and Exchange Commission lawsuit. A few days earlier, the SEC fined the parent of another big crypto exchange, Kraken, and forced it to stop offering a popular type of crypto-yield product to U.S. investors. Banking regulators are quietly pushing banks to cut ties with crypto customers, limiting their ability to plug into the real-world financial system. The flurry of actions came after years of slow-moving investigations and debate in Washington over how to best handle the fast-growing industry. Some observers detected a shift in officials’ tone after the collapse of the FTX crypto exchange, which strengthened the hand of politicians and regulators calling for tougher enforcement. Now crypto executives are bracing for more regulatory lawsuits and investigations, and investors have started to flee suspected targets.

For the last two decades, officers and directors at U.S. public companies seeking to trade illicitly on inside information had an almost infallible get-out-of-jail-free card, the Wall Street Journal reported. All they had to do was use prearranged trading plans when they bought and sold their companies’ shares. The odds the government would target them for enforcement actions were slim. It was an unintended consequence of a regulation adopted in 2000 called Rule 10b5-1 that academic research shows was abused by some executives. That regime is about to change. A new Securities and Exchange Commission rule promises to remove many of the loopholes that allowed corporate insiders to hide behind these trading plans. For most U.S.-listed companies, new disclosure requirements will kick in April 1. Among the highlights: Officers and directors will have to wait at least 90 days after starting or modifying a 10b5-1 plan before they can trade under the arrangement. The forms used to report their trades will include mandatory checkbox disclosures showing whether they were using such a plan, as well as the plan’s adoption date. The companies, too, will have to disclose the substance of 10b5-1 plans in their quarterly and annual reports.

Crypto businesses don’t properly safeguard their customers’ assets and often mix them with their own funds, according to Securities and Exchange Commission Chair Gary Gensler, Bloomberg News reported. “This is largely a noncompliant field,” Gensler said. “They’re commingling customer funds with their businesses.” The blunt assessment by Wall Street’s main watchdog follows months of warnings by Gensler and U.S. regulators over potential dangers posed by the digital-asset industry. The SEC has asserted that many tokens and crypto products are really just securities that trade on the blockchain and should be registered with the agency. On Thursday, the regulator announced that the trading platform known as Kraken had agreed to pay a $30 million penalty to settle allegations that its staking products for American clients violated SEC rules. The firm, which also agreed to discontinue them in the U.S. as part of the deal, didn’t admit or deny the regulator’s claims. Crypto staking works by letting users generate yields in return for allowing their tokens to be used to facilitate transactions on a blockchain. Like several other digital-asset products, the SEC has said that it can resemble a security that should be registered with the agency. In his Bloomberg interview on Friday, Gensler took particular issue with how crypto exchanges often play multiple roles. He suggested that their business models can create significant conflicts of interest. Read more.

In related news, Federal Reserve Governor Christopher Waller said on Friday that he views crypto as a speculative asset that's worth whatever the next person is willing to pay for it and says he, personally, wouldn't hold it, YahooFinance.com reported. "To me, a crypto-asset is nothing more than a speculative asset, like a baseball card," Waller said. "If people want to hold such an asset, then go for it," Waller said. "I wouldn't do it, but I don't collect baseball cards, either. However, if you buy crypto-assets and the price goes to zero at some point, please don’t be surprised and don’t expect taxpayers to socialize your losses." Waller said that it's critical to make sure that the risks associated with crypto are mitigated, but that regulators shouldn't "unduly limit" the development and potential future uses of any positive features of crypto. Read more.

The Securities and Exchange Commission escalated its enforcement campaign against the cryptocurrency industry Thursday with a settlement that could imperil a lucrative activity for other major crypto firms, the Wall Street Journal reported. On Thursday, Payward Inc.’s Kraken platform agreed to stop offering so-called crypto staking services in the U.S. and pay $30 million in penalties to the SEC. Staking allows investors to earn a yield by temporarily handing their crypto tokens over to either an intermediary or a cryptocurrency network. The first case of its type, the settlement advances SEC Chair Gary Gensler’s effort to rein in what he characterizes as widespread noncompliance with U.S. securities laws by crypto platforms. Since taking office in 2021, Mr. Gensler has argued that crypto exchanges have broken the law by allowing investors to buy and sell assets that should have been registered with the SEC before they were offered. The SEC has yet to fully test Mr. Gensler’s theory in court, drawing criticism from some investor-protection advocates that the agency moved too slowly to stop the wave of bankruptcies that have plagued crypto in recent months. It only sued Sam Bankman-Fried after his crypto exchange, FTX, mishandled billions of dollars of investor funds and collapsed.

Kraken, one of the world’s largest cryptocurrency exchanges, is embroiled in a probe by a top US financial regulator over whether it broke securities rules related to certain offerings to American clients, Bloomberg News reported. The Securities and Exchange Commission probe into whether Kraken offered unregistered securities is at an advanced stage and could lead to a settlement in coming days, said the person, who asked not to be identified discussing a case that hasn’t been made public. It wasn’t immediately clear which tokens or offerings are drawing scrutiny. Any action against Kraken could have significant ramifications for the industry, already facing sharp scrutiny in Washington after FTX’s collapse late last year. A settlement with the SEC could pressure other crypto firms to hash out deals with the regulator, which has repeatedly said most of the tokens being offered are securities that should be subject to the agency’s rules. SEC Chair Gary Gensler told Bloomberg in December that “the runway is getting shorter” for crypto firms to register with the agency. Kraken, whose legal name is Payward Inc., and the SEC declined to comment. SEC probes don’t always lead to enforcement action but can result in firms and individuals paying fines and facing other penalties.

Sen. Elizabeth Warren (D-Mass.) said yesterday that the Securities & Exchange Commission is off to a good start when it comes to regulating crypto, but said that the agency still has more work to do in overseeing the industry, YahooFinance.com reported. “The commission has been loud and clear that crypto doesn't get a pass from longstanding security laws that protect investors," Warren said during a speech yesterday. "The SEC has the right rules and the right experience and [SEC Chair] Gary Gensler is demonstrating that he is the right leader to get the job done," Warren said. "[But] the SEC needs to do even more and use the full force of its regulatory powers across the entirety of the crypto market." Warren called on the SEC to double down on using tools to enforce securities laws, and said where the agency needs more cops on the beat it is on Congress to step up with more resources for the Commission.

Crypto asset manager Grayscale Investments is gearing up for a prolonged legal fight with the U.S. Securities and Exchange Commission to create a spot bitcoin exchange-traded fund, the company’s chief executive officer said, Reuters reported. As the company awaits a court ruling on a June lawsuit against the SEC, CEO Michael Sonnenshein said that he was prepared to appeal if the court backed the SEC's decision to reject the bitcoin ETF proposal. "The only option the SEC left us with was to turn around and say, you know what, this just isn't right,” Sonnenshein said. Suing the regulator was one of the most important decisions he had made as CEO, and was "one that I did not, and we as a team, did not take lightly," he said, adding that he is confident the court will rule in the firm's favor. The SEC rejected Grayscale’s application to convert its flagship Grayscale Bitcoin Trust (GBTC) into an ETF in June, arguing that the proposal did not meet standards designed to prevent fraudulent practices and protect investors. Grayscale sued the SEC almost immediately after its proposal was denied, claiming that the regulator was acting arbitrarily in rejecting applications for spot bitcoin ETFs when it had previously approved bitcoin futures ETFs. The case is being heard in front of the District of Columbia Court of Appeals. If either party were to appeal the ruling, the case would either go to the U.S. Supreme Court or an en banc_ panel review. Oral arguments in the case are scheduled to occur March 7 and Grayscale expects a final ruling on the case in the fall, said Sonnenshein.

The Securities and Exchange Commission (SEC) yesterday proposed a rule to implement Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act, according to a SEC press release. The rule is intended to prevent the sale of asset-backed securities (ABS) that are tainted by material conflicts of interest. Specifically, the rule would prohibit securitization participants from engaging in certain transactions that could incentivize a securitization participant to structure an ABS in a way that would put the securitization participant's interests ahead of those of ABS investors. The Commission originally proposed a rule to implement Section 27B in September 2011. If adopted, new Securities Act Rule 192 would prohibit an underwriter, placement agent, initial purchaser, or sponsor of an ABS, including affiliates or subsidiaries of those entities, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in such ABS. Under the proposed rule, such transactions would be “conflicted transactions.” They include, for example, a short sale of the ABS or the purchase of a credit default swap or other credit derivative that entitles the securitization participant to receive payments upon the occurrence of specified credit events in respect of the ABS. The prohibition on conflicted transactions would commence on the date on which a person has reached, or has taken substantial steps to reach, an agreement that such person will become a securitization participant with respect to an ABS, and it would end one year after the date of the first closing of the sale of the relevant ABS.