In October 2024, Crypto.com filed a lawsuit against the U.S. Securities and Exchange Commission (“SEC”) in response to receiving a Wells notice, which indicated the SEC’s intention to bring an enforcement action against the company.[1] This lawsuit represents a significant development in the ongoing regulatory battle between cryptocurrency companies and the SEC.
In its complaint, Crypto.com made several allegations against the SEC. First, Crypto.com alleges “that the SEC has unilaterally expanded its jurisdiction beyond statutory limits and separately that the SEC has established an unlawful rule that trades in nearly all crypto assets are securities transactions no matter how they are sold, whereas identical transactions in bitcoin (BTC) and ether (ETH) are somehow not.”[2] Crypto.com alleges that the SEC, as a result, has been inconsistent with applying securities laws to crypto assets.[3] According to the company, this inconsistency demonstrates that the SEC’s approach to cryptocurrency regulation is arbitrary and capricious, treating similar network tokens differently without adequate explanation as to why.[4]
Crypto.com also alleges that the SEC improperly created a financial instrument called “Crypto Asset Security” without proper statutory authority or formal rulemaking notice and comment period required by the Administrative Procedure Act (“APA”). In summary, Crypto.com alleges that the SEC overstepped its lawful authority in attempting to regulate the cryptocurrency market, has done so inconsistently, and made up the rules as it went along.
In relief, Crypto.com is asking the court to declare that the SEC lacks authority over the company and halt what it perceives as the SEC’s “illegal actions” against the crypto industry.[5] Crypto.com has also filed a petition with the Commodity Futures Trading Commission (“CFTC”) and the SEC to establish a more transparent regulatory framework for cryptocurrency derivatives in the U.S.[6] In its press release issued when the complaint was filed, Crypto.com states that it “is committed to using all regulatory tools available to help bring certainty to the industry, including this petition for joint rulemaking under the Dodd-Frank Act.”[7]
The implications of this lawsuit could dramatically and definitively reshape the regulation of cryptocurrency. The SEC’s approach to regulating cryptocurrencies through enforcement, which has been the subject of heavy criticism, would have to be re-evaluated if Crypto.com is successful. Furthermore, a decision could provide much needed clarity on the SEC’s jurisdiction over crypto assets and potentially force the development of a more comprehensive regulatory framework.[8] A resolution here may influence the future of innovation and development of cryptocurrencies in the U.S. and affect the country’s competitiveness in the global digital asset market.[9]
This lawsuit represents a bold move by Crypto.com to challenge the SEC’s authority and could potentially reshape the regulatory landscape for cryptocurrencies in the United States. In contrast, crypto industry giant Coinbase, Inc. (“CoinBase”) is going through its own legal battles that have several important similarities.
Both companies are challenging the SEC’s jurisdiction of crypto assets and the agency’s regulatory approach, particularly the SEC’s regulation by enforcement rather than regulation by rulemaking.[10] Both companies also argue that the SEC has inconsistently applied securities laws to crypto assets, particularly regarding Bitcoin and Ethereum.[11] Both companies also seek a clearer regulatory framework to conduct business.[12]
While both companies are fighting against what they perceive as SEC overreach, Crypto.com’s approach is more proactive and broader in scope, while Coinbase’s battles have been more focused on defending against specific enforcement actions. Crypto.com’s litigation is pre-emptive and focuses on attacking the SEC’s rule making authority where it categorizes most crypto transactions as securities.[13] Coinbase’s litigation is defensive in nature, where it contests specific charges of operating as an unregistered exchange, broker, and clearing agency.[14] Another key difference is that Crypto.com is seeking declaratory and injunctive relief to halt the SEC’s “unlawful” campaign, while Coinbase is seeking to have charges dismissed and challenging the application of the Howey test to crypto assets.[15]
While the Crypto.com lawsuit is still in its nascent stages, the Coinbase lawsuit is significantly more advanced, with a New York federal court rejecting most of Coinbase’s arguments in March 2024.[16] At this time it is unclear how these two very different actions that raise similar legal issues will affect each other, but it looks like the decisions in these actions are likely to meet at some point.
The Crypto.com lawsuit has the potential to moot the SEC’s action against Coinbase if rule making authority belongs with the CFTC instead of the SEC or if the SEC rule was in violation of the APA. Alternatively, the SEC could point to the favorable district court rulings in the action against Coinbase as support for fending off Crypto.com’s legal strike. Another influencing factor is the November 2024 U.S. Presidential election, where Donald Trump has promised to fire SEC Chair Gary Gensler “on day one.”[17]
Even if it is unclear which side will eventually emerge victorious, the legal implications of one court deciding which regulatory body has the authority to implement a regulatory framework and how regulations are applied will have a broad impact on the crypto industry and how it is regulated in the future.
[1] Kyle Torpey, Crypto.com Sues SEC Over Crypto Regulation After Wells Notice, Investopedia (Apr. 18, 2023), https://www.investopedia.com/crypto-com-sues-sec-over-crypto-regulation-after-wells-notice-8724838.; Crypto.com Sues SEC Amid Threat of Enforcement Action, PYMNTS.com (Oct. 18, 2024), https://www.pymnts.com/cryptocurrency/2024/crypto-com-sues-sec-amid-threat-of-enforcement-action/.
[2] Crypto.com, Complaint Filed Against SEC (Apr. 17, 2023), https://crypto.com/company-news/complaint.
[3] David Hirsch, Garen S. Marshall and Rhea Shahane, Crypto.com Sues the SEC in Texas: Arguments and Implications for the Cryptocurrency Industry, Subject to Inquiry (Oct. 21, 2024), https://www.subjecttoinquiry.com/2024/10/crypto-com-sues-the-sec-in-texas-arguments-and-implications-for-the-cryptocurrency-industry/.
[4] Id.
[5] Note 2, supra.
[6] Note 1, Torpey, supra.
[7] Note 2, supra.
[8] Note 3, supra.
[9] Crypto.com Sues SEC Amid Threat of Enforcement Action, PYMNTS.com (Oct. 18, 2024), https://www.pymnts.com/cryptocurrency/2024/crypto-com-sues-sec-amid-threat-of-enforcement-action/.
[10] Note 1, Torpey, supra; see also Robert A. Schwinger, SEC’s Crypto Enforcement Authority Sustained Over Coinbase’s Vigorous Challenges, Norton Rose Fulbright (Apr. 14, 2023), https://www.nortonrosefulbright.com/en/knowledge/publications/9da04ce0/secs-crypto-enforcement-authority-sustained-over-coinbases-vigorous-challenges
[11] Note 1, Torpey, supra.
[12] Gabrielle Saulsbery, Crypto.com Sues SEC, Yahoo Finance (Oct. 17, 2024), https://finance.yahoo.com/news/crypto-com-sues-sec-145854862.html.
[13] Id.
[14] Note 10, supra.
[15] See Note 1, supra; see also Note 10, supra.
[16] Nikhilish De, Coinbase Loses Most of Motion to Dismiss SEC Lawsuit, CoinDesk (Mar. 27, 2024), https://www.coindesk.com/policy/2024/03/27/coinbase-loses-most-of-motion-to-dismiss-sec-lawsuit/.
[17] Tonya Evans, Trump Says ‘Fire’ SEC Chair, Yahoo Finance (Aug. 17, 2024), https://finance.yahoo.com/news/trump-says-fire-sec-chair-145122475.html.