SEC Takes Action Amid Growing Crypto Security Concerns

The SEC is responding to escalating crypto security threats by pivoting from heavy-handed enforcement to a more balanced, preventive approach. Key actions include issuing preemptive warning notices to crypto firms, allowing state trust companies to serve as compliant custodians, streamlining examination priorities to emphasize tech-neutral regulations like custody and AML, and rescinding numerous prior proposals. These steps show a deliberate shift toward safeguarding investors while acknowledging the market’s evolving nature.

Balancing Enforcement with Prevention

Warning First, Then Enforcement

Rather than surprising crypto firms with enforcement actions, SEC Chair Paul Atkins announced that the agency will issue preliminary warning notices addressing technical violations before pursuing formal penalties. This shift is a marked departure from the aggressive enforcement style of previous leadership. Atkins described the old method as “shoot first and ask questions later,” underscoring the need for a more measured, transparent regulatory process.

Rescinding Past Crypto Rule Proposals

In another signal of regulatory pivot, the SEC formally withdrew 14 proposed rules set under the Biden-era leadership, many of which targeted stricter oversight of crypto platforms. This rollback reflects the new regime’s preference for fostering industry growth over pursuing burdensome regulations.

Redefining Regulatory Focus

Crypto Dropped from 2026 Risk Examination

For the fiscal year 2026, the SEC’s examination priorities no longer list cryptocurrency as a standalone risk category. Instead, topics such as information security, operational resilience, AML, privacy obligations, and custody fall under tech-neutral oversight—implicitly covering crypto activities without labeling them separately. This strategically aligns crypto under broader regulatory umbrellas, easing perceived regulatory pressure while preserving compliance standards.

Permitting State Trust Companies as Custodians

Following the collapse of the $1.7 billion HyperFund Ponzi scheme, the SEC issued a landmark no-action letter allowing registered investment advisors and companies to use state trust companies (STCs) as custodians for crypto assets, subject to conditions. This marks a significant leap forward in legitimate and safer custody frameworks—addressing critical vulnerabilities in private key management and oversight.

Enforcement Shift: From Broad to Targeted

Focus on Fraud, Not Registration Alone

The newly restructured Cyber and Emerging Technologies Unit is leaner, with fewer staff, and is laser-focused on fraud involving blockchain and crypto assets rather than broader registration-based enforcement. Commissioner Hester Peirce emphasized that though enforcement is narrowing, it is not ending—bad actors remain squarely in the SEC’s sights.

Selective Legal Resolutions and Ongoing Cases

While several cases have been dismissed or paused—such as those against Coinbase, Kraken, ConsenSys, Binance, Robinhood Crypto, Uniswap, OpenSea, and Gemini—a few high-profile matters persist. Ripple’s appeal continues, and lawsuits involving Ripple, Cumberland DRW, Pulsechain, Crypto.com, and Immutable remain open or under investigation.

High-Profile Accountability: Terraform Labs and Do Kwon

Amid regulatory easing elsewhere, the SEC delivered one of its most significant enforcement blows by holding Terraform Labs and its founder Do Kwon accountable for fraud. A unanimous jury verdict mandated over $4.5 billion in penalties, highlighting that egregious misconduct still triggers major consequences.

This contrast underscores the new regime’s twin focus: enabling innovation but not at the expense of investor protection.

Narrative Flow: A Real-World Example

Imagine being a compliance officer at a mid-sized crypto brokerage. Under the previous regime, you’d brace for sudden SEC investigations. Now, you get a warning outlining a mismatched custody control. You fix that, knowing you won’t be hit with enforcement—unless there’s clear fraud. If you’re an investment advisor worried about storing client crypto assets, you can now consider STCs as viable custodians, with clarity on conditions and audits. All of this, while knowing major fraud cases—like Terraform—will still result in serious consequences. It’s predictable, it’s intentional, and it’s evolving regulatory order.

“Travel to a destination where people have great freedom to experiment and build interesting things—with no tolerance for liars, cheaters, and scammers.”

This statement from SEC leadership captures the shift: innovation welcomed, deception not tolerated.

Conclusion

The SEC is navigating the turbulent waters of crypto regulation by recalibrating its approach toward balance and clarity. Warning notices and tech-neutral risk frameworks reflect a commitment to orderly oversight rather than blanket crackdowns. The introduction of state trust custodians is a tangible step toward safer infrastructure, while high-profile penalties for blatant fraud ensure investor protections remain central. Navigating forward, firms that prioritize compliance and transparency will benefit most in this more nuanced regulatory landscape.

FAQs

What is the SEC’s new approach to crypto enforcement?

Instead of immediate enforcement actions, the SEC now issues warning notices for technical violations. This encourages firms to self-correct before formal penalties are considered.

Why was crypto removed from the 2026 risk priorities?

The SEC’s 2026 document treats crypto under broader categories like custody and AML, rather than singling it out—demonstrating a shift to more generalized, technology-neutral regulation.

Can advisors now use state trust companies for crypto custody?

Yes. A recent SEC no-action letter allows registered investment advisors and funds to use STCs as custodians under specified conditions—an important breakthrough for institutional-grade custody solutions.

Does crypto face less enforcement now?

While many non-fraud cases have been dropped or paused, fraud-based enforcement remains a priority. The SEC has narrowed its focus but remains aggressive where wrongdoing is evident.

What happened in the Terraform Labs case?

Terraform Labs and its founder Do Kwon were found liable for billions in fraud, resulting in more than $4.5 billion in penalties—underscoring that serious misconduct will still be met with severe consequences.

Which crypto cases are still ongoing?

Ongoing or unresolved cases include those involving Ripple, Cumberland DRW, Pulsechain, Crypto.com, and Immutable. Legal action is still active or pending in these matters.