Crypto freedom on the chopping block? eToro’s SEC deal raises alarms

Could eToro’s settlement with the SEC be the start of a major shift in how crypto assets are regulated, and will other platforms face similar pressures in the near future?

SEC strikes, eToro reaches settlement

eToro, a global crypto trading platform based in Israel, has found itself in the middle of a regulatory shakeup. The company, known for offering a variety of assets including stocks and cryptocurrencies, recently reached a settlement with the U.S. Securities and Exchange Commission.

The regulator alleges that eToro allowed US clients to trade certain crypto assets without registering them as securities, which violated federal law.

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

Going forward, only Bitcoin (BTC), Bitcoin Cash (BCH), and Ethereum (ETH) will remain available for trading. Users will have 180 days to sell other crypto assets.

This deal is a milestone for crypto investors in the United States, especially those who rely on eToro to trade a wide range of crypto assets.

eToro has neither admitted nor denied the SEC’s accusations, but CEO Yoni Assia has said they are committed to working with regulators to ensure compliance.

This development raises an important question: Given the SEC’s recent actions, could this be the start of a broader crackdown on crypto platforms?

SEC crackdown on cryptocurrencies

Under the leadership of Chairman Gary Gensler, the SEC has intensified its investigations into the crypto world and has filed lawsuits against companies in this space one after another.

Gensler, who took over in early 2021, has made it clear that he believes most cryptocurrencies are, in fact, securities. And that’s where the problem begins.

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

From centralized exchanges like Coinbase, Binance, Kraken, and Robinhood to decentralized finance projects and now NFTs, almost no corner of the crypto sector has been left untouched.

Take OpenSea, the largest NFT marketplace, for example. On August 28, it received a Wells notice from the SEC, essentially a formal warning that the agency was considering taking enforcement action.

The SEC believes that some NFTs sold on the platform may actually be securities. If the SEC does so, it could mean major changes to how NFTs are traded and viewed in the US

OpenSea isn’t the only platform on the SEC’s radar. In April, decentralized exchange Uniswap (UNI) was also hit with a Wells notice.

Like eToro, the SEC has alleged that Uniswap is acting as an unregistered brokerage firm. If these projects are forced to change how they operate, it could send shockwaves through the crypto space and affect how people trade and invest in decentralized tokens.

Some industry insiders believe these actions are part of a broader government strategy called “Operation Bottleneck 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, thus making it difficult for companies to operate.

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

But one notable exception is Bitcoin. Previous regulators agreed that Bitcoin was decentralized enough to avoid being classified as a security and was instead considered a commodity.

Ethereum, meanwhile, has gained more clarity in recent months. While it has long existed in a gray area, the approval of spot Ethereum ETFs in July 2024 further solidifies its status as a non-security.

Additionally, eToro’s decision to continue offering Ethereum alongside Bitcoin and Bitcoin Cash to US users aligns with this view and signals that the SEC may be warming up to Ethereum’s regulatory status.

Reactions of experts and public opinion

News of eToro’s settlement with the SEC has sparked widespread debate. From legal experts to everyday crypto fans, everyone has an opinion on what this means for the future of crypto in the US

Drew Hinkes, a professor at New York University Stern and an expert in crypto law, expressed concern and confusion over the SEC’s handling of the case.

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

“We continue to speculate on what assets the SEC deems to be ‘securities’ and what assets they do not,” he noted, highlighting the uncertainty this creates for the market. This uncertainty is sending token projects once listed on eToro into what he called “regulatory purgatory.”

The SEC is not helping market players by not naming securities; we are left guessing which assets the SEC deems to be “securities” and which ones are not, and anyone whose token is listed on eToro is now in even bigger regulatory hell. /7

— Drew Hinkes (@propelforward) September 12, 2024

Hinkes also pointed out a key contradiction in the settlement. While the SEC determined that eToro violated securities laws, it did not provide a clear path for companies seeking to comply.

“The SEC is not helping market players,” he said, citing a lack of specific guidelines on how companies should ensure compliance with securities laws.

It would be extremely useful to understand who an unregistered broker might sell digital asset securities to. A BD? An RIA? Offshore? We don’t know the answer, and my suspicion is that we won’t know if the industry adopts this as a practice/uses it as a defense against an SEC investigation. /11

— Drew Hinkes (@propelforward) September 12, 2024

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

Consensys attorney Bill Hughes took a more realistic stance, stating that the $1.5 million fine was small compared to the size of eToro’s US user base.

According to the SEC’s order, eToro US had approximately 240,000 customer accounts. To put that into perspective, @coinbase There are over 100 million.

$1.5 million is nothing. It’s an exit fee to leave the United States behind and focus on international trade. https://t.co/JsCjYycV8V

— Bill Hughes : wchughes.eth 🦊 (@BillHughesDC) September 12, 2024

eToro had about 240,000 U.S. customer accounts, a drop in the bucket compared to Coinbase’s 100 million users, according to Hughes. He framed the settlement as an “exit fee” rather than a hefty penalty.

The deal has also sparked heated backlash in the crypto community, with many retail investors and crypto enthusiasts saying the SEC’s enforcement actions stifle innovation rather than protect consumers.

The One X user openly accused the SEC of harming the people it claims to protect. “You protected no one. You restricted access to retail customers. You attacked a legitimate US company,” he tweeted, expressing frustration at what he saw as the agency’s overreach.

You didn’t protect anyone.
You have restricted access to retail customers.
He attacked a legitimate US company.
Theft of wages by hardworking Americans for a service they volunteered to perform using their tax dollars.
YOU ARE PIG

— Steve Mesa (aka Wrong_again) (@Wrong_again9205) September 12, 2024

Similar views echoed on social media, with another user arguing that the SEC’s approach makes it impossible for companies to achieve compliance because the regulatory framework is unclear.

The SEC is not protecting anyone! It is hindering innovation, not helping it. Cryptocurrencies have no compliance or regulation, so how does one become compliant? What a joke! I will vote for anyone who gets rid of Gary Gensler!!!

— Alva (@Alvak21) September 12, 2024

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

With OpenSea and Uniswap also receiving Wells notices, it’s clear the SEC isn’t done cracking down on crypto projects, but whether this will lead to clearer rules or simply push innovation offshore remains an open question.