FTX case could bring SEC closer to banning crypto exchanges

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The Securities and Exchange Commission (SEC) appears to be compiling legal ammunition to tackle the beating heart of the global crypto economy: centralized crypto exchanges. And the agencies’ case against FTX reveals arguments that could advance this strategy.

On Wednesday, the SEC announced charges against two key allies of disgraced FTX founder Sam Bankman-Fried: Caroline Ellison, former CEO of FTX affiliate trading firm Alameda Research, and Gary Wang, co-founder of FTX. In addition to revealing that Ellison and Wang turned against Bankman-Fried and are now cooperating fully with federal authorities, the complaint revealed that the SEC, in its pursuit of securities fraud charges relating to FTX’s sale of its native token FTT, appears to be stepping up its assault on crypto. assets as a whole.

If so, it fits with the agency’s recent and successful lawsuit against blockchain-based content-sharing platform LBRY.

Not surprisingly, the SEC charged Ellison and Wang with securities fraud for manipulating the price of FTT and for offering FTT as an unregistered security. This action follows a plethora of actions taken by the securities regulator in the past. But the language of complaints about the FTT went much further.

Wednesday’s complaint characterized the security FTT as an illiquid crypto asset, bringing out the subtle but crucial point that the SEC considers the FTT to be a security in itself, regardless of how it was offered or sold. SEC Chairman Gary Gensler doubled down on that view yesterday when announcing the charges against Ellison and Wang, calling FTT an exchange cryptographic security token that was an integral part of FTX.

Although seemingly semantic, the difference between pursuing a lawsuit against a company for offering an asset as collateral and labeling an asset inherently as security in all contexts, marks a shift in the SEC’s approach to security. safety regulations for decades. The change could mean a potentially substantial escalation in agencies’ efforts to regulate the crypto industry.

If the SEC can get the courts to agree that crypto tokens such as FTT are securities regardless of how they are offered, the agency could sue more than the projects that create those tokens. The SEC could target any intermediary who sells these tokens in any context. In such a scenario, major crypto exchanges such as Coinbase, Kraken, and Binance would face immense legal liability and would either be allowed to participate in suspicious crypto-registered exchanges like the New York Stock Exchange or shut down.

Last month, the SEC defeated blockchain-based publishing platform LBRY in federal court and asked a judge to imply in its ruling that LBRY’s native LBC token could be considered a security.

What the LBRY ruling does is a major step forward in the SEC’s quest to label all tokens as securities, and that is indeed a very, very important thing, said Lewis Cohen, an attorney. specializing in crypto and securities regulation, at Decrypt at the time. (Cohen has previously represented Decrypt.)

The SEC has shifted gears, Cohen said. Instead of attacking projects, they want to attack markets and intermediaries.

The SEC’s victory against LBRY, however, came in the US District Court for the District of New Hampshire, a court with no major influence on federal case law. The SEC’s current case against FTX, meanwhile, unfolds in the U.S. District Court for the Southern District of New York, the Manhattan-based overseer of Wall Street activity so central to federal financial law that ‘It is regularly referred to as the Mother Court by legal professionals.

Before FTX’s stunning collapse last month, the next hurdle in the SEC’s apparent quest to take on crypto exchanges appeared to be winning its pending lawsuit against blockchain payments firm Ripple Labs. Experts wondered if the federal agency would be able to get a Southern District of New York judge in this case to label the Ripples XRP token as inherently safe.

There will be no such anticipation that will weigh on the SEC vs. FTX case; Ellison and Wang have already pleaded guilty to all charges.

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