The Unintended Consequences of SEC Crypto Enforcement Actions

The upcoming resignation of US Securities and Exchange Commission (SEC) Chair Gary Gensler on January 20, 2025, may herald a major shift in the agency's aggressive stance towards cryptocurrency regulation. Under Gensler's tenure, the SEC initiated lawsuits against major crypto exchanges like Binance and Coinbase and expanded the definition of securities to include specific digital assets—often without providing a clear framework for their classification. Our research offers timely insight into how this enforcement-heavy strategy, which involved unexpectedly classifying specific crypto assets as securities, disrupted markets, eroded investor confidence, and ultimately undermined the SEC's core mandate to ‘protect investors, maintain fair, orderly, and efficient markets.’

At the core of the current regulatory dilemma is the Howey Test, a 1946 Supreme Court decision designed to classify traditional financial (TradFi) instruments—such as shares in orange groves—as securities if there is an expectation of profit from the efforts of others. While the standard performed adequately in an era dominated by TradFi, its binary framework fails to capture the complexity of modern cryptocurrencies, which often blend investment, decentralized governance, and utility features, placing them in a legal gray area. The ongoing Ripple lawsuit illustrates this tension: courts determined that XRP classification as a security depends on the nature of each transaction, challenging the Howey Test's application in an age of decentralized finance and calling into question the SEC's enforcement-driven regulatory approach.

Our paper ‘Uncertain Regulations, Definite Impacts: The U.S. SEC's Regulatory Interventions and Their Effects on Crypto Assets’ quantifies how SEC enforcement actions influence cryptocurrency prices and trading behavior. Drawing on SEC enforcement actions from 2017 to 2023, we cross-referenced data from the SEC's EDGAR database, press releases, reputable media outlets, and daily trading histories. We apply an event study methodology, calculating each asset's typical historical return and comparing it to the actual return following an SEC announcement. The resulting difference—abnormal return—enables isolation and quantification of the ‘SEC Effect’—the direct market disruption caused by regulatory interventions.

The results demonstrate that SEC announcements—all unexpected—classifying specific crypto assets as securities trigger immediate sell-offs. On average, prices drop by 5.2% within the first three days following each announcement, deepening to 17.2% over 30 days. Trading volumes also contract, reflecting an immediate shock and lingering reluctance to trade these assets. Notably, larger market capitalization and older cryptocurrencies—often perceived as relatively more stable—are not immune because their high visibility makes them prime targets for future regulatory action. Furthermore, while their broader investor bases help distribute the impact, they remain vulnerable to contagion.

Smaller, illiquid, and volatile cryptoassets experience the most pronounced losses as investors struggle to find buyers, while volatile tokens see amplified swings due to heightened uncertainty. Investor risk aversion and liquidity challenges further amplify these effects, as regulatory uncertainty deters buyers and increases selling pressure. In these conditions, cautious investors retreat, liquidity dries up, and the market becomes increasingly fragile. We find that positive investor sentiment can mitigate some of the harm but cannot reverse the overarching downward trend. Our results reveal that as regulatory ambiguity persists following SEC announcements, investors are inclined to wait on the sidelines, suspending trading until clearer rules emerge.

These findings reveal a broader issue: unclear and inconsistent regulation often appears arbitrary and counterproductive. The SEC's ad-hoc enforcement actions—targeting some cryptocurrencies and exchanges while overlooking others without clear justification—foster confusion and erode confidence in the regulatory process. Heavy-handed measures push market participants into unpredictable environments without clear guidelines and often fail to effectively deter illicit activity, instead driving it offshore or underground. When China banned crypto in 2021, the market dipped 41% but quickly shifted to offshore exchanges, and similar patterns appeared in Korea and Japan. Decentralized platforms beyond the regulatory radar also thrive amid restrictive policies but may expose participants to operational risks.

While financial metrics quantify regulatory impacts, the resulting volatility exacts an emotional toll. On forums like Reddit's r/cryptocurrency, investors routinely reported stress, anxiety, and—in extreme cases—suicidal thoughts during severe market downturns triggered by sudden SEC announcements. This spotlights the urgent need to address mental well-being as a critical yet often overlooked aspect of the SEC's ad-hoc enforcement actions. Clear, consistent, and predictable regulation affects more than market efficiency; it influences mental health and confidence in emerging financial technologies.

The SEC's recent actions prompt a pressing question: Is a legal standard developed in 1946 appropriate for decentralized digital assets? Our research highlights the shortcomings of the current regulatory approach, which relies on enforcement actions rather than coherent guidelines. Aggressive crackdowns fail to protect investors and foster disorderly and inefficient markets. To realize the potential of crypto markets while minimizing harm, regulators must move beyond ad hoc measures. A balanced framework—offering clarity, fairness, and room for growth—is vital to fostering a thriving, transparent, and stable crypto ecosystem.

Aman Saggu is Professor at Mahidol University International College and Blockchain Research Lab.

Lennart Ante is Assistant Professor at Constructor University and Blockchain Research Lab.

Kaja Kopiec is Research Associate at Blockchain Research Lab.