Sorry Crypto World, But The SEC Isn’t Backing Down On Regulation By Enforcement

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By Alison Frankel

(Reuters) Since covering U.S. Securities and Exchange Commission litigation against crypto targets, the industry has harshly criticized the commission for taking enforcement action one at a time as a way to set policy. of crypto regulation, instead of engaging in formal rulemaking or waiting for Congress to pass legislation that clarifies when US securities laws apply to digital assets.

In the latest example, a former director of Coinbase Global Inc who was charged last year with insider trading by the US Department of Justice and the SEC decided this week to dismiss the SEC complaint, arguing, between others, that he was unfamiliar with the Ethereum-based crypto tokens he traded would be defined as securities by the SEC. Former Coinbase employee Ishan Wahi pleaded guilty on Tuesday to conspiracy to commit wire fraud, but even during the plea hearing in his criminal case, Wahi insisted that the tokens involved were not were not titles.

The only certain feature of the SEC’s approach to digital asset regulation is its uncertainty, defense attorneys for Wahis de Jones Day, Greenberg Traurig and Harris St. Laurent & Wechsler argued in Monday’s motion. seeking to dismiss the SEC’s case against Wahi and his brother.

Coinbase has expressly stated that the tokens traded by Wahi and his brother are not securities, his lawyers said, and Congress has not told crypto investors which digital coins may be regulated by the SEC. Right now, Wahi argued, crypto users are just left guessing about their exposure to SEC enforcement and that’s not sustainable.

At some point, according to the brief, the SEC’s Delphic strategy of revealing unique titles via enforcement action must come up against basic legal system protections.

The SEC seems to think otherwise. Based on commissions filed this week in a declaratory judgment suit from a crypto law firm demanding a ruling that the Ethereum blockchain network and its native Ether cryptocurrency are not securities under US law. , the SEC seems in no rush to change the Delphic strategy that has such enraged crypto defendants.

Hodl Law, which describes itself as focusing on legal services for digital assets and cryptocurrency, sued the SEC last November in federal court in San Diego, arguing that the SEC engaged in delays and a deliberate obfuscation of several years in order to extend its regulation. access cryptocurrencies. This strategy, Hodl Law claimed, did not give token holders fair notice as to whether their coins are securities.

Hodl Law cited the SEC’s Wahi case as arguing that due to the SEC’s alleged refusal to provide concrete advice, millions of Ethereum users, including the law firm, are in desperate need. of a declaratory judgment that Ether is not a security and the Ethereum agreements are not. securities transactions. Otherwise, Hodl Law said, Ethereum users have no idea if the SEC will step in with enforcement action.

In Monday’s dismissal filing, the SEC presented technical arguments to dismiss the case, telling U.S. District Judge James Lorenz that because there is no pending case or controversy between Hodl Law and the commission, the law firm has no constitutional status and the court has no jurisdiction under the Declaratory Judgment Act.

But that was not all. The SEC also said it was not obligated to warn crypto users about its interpretation of securities laws.

Hodl Law did not allege that the SEC had an obligation to explain to it Hodl Laws’ rights under federal securities laws or to promise not to sue it in the future, or to indicate any law who would impose such an obligation, the SEC said. At its core, the complaint only shows Hodl Laws’ desire for the SEC to enact rules regarding crypto/digital assets.

General law firm concern about the possibility of an SEC investigation and speculation about the SEC’s views on crypto/digital assets are not cause for action, the SEC said. Simply put, according to the commission, Hodl Law and all other Ethereum users will just have to wait for the SEC to do what the commission decides to do.

This stance is sure to irritate the crypto industry, no matter how strong the SEC’s other arguments to dismiss the Hodl Law case.

The SEC declined to comment on the Wahi or Hodl cases. Wahi’s attorney, James Burnham of Jones Day, declined to make a statement.

Frederick Rispoli, a partner at Hodl Law, said via email that the SEC’s motion to dismiss was not available regarding the numerous cases in which the commission attacked users of digital assets with enforcement actions after cut. These cases, including the Wahi litigation, demonstrate the imminent danger facing Ethereum users, according to Rispoli.

Several SEC targets, as you probably recall, attempted to persuade federal judges that the crypto assets at issue in their cases did not meet the definition of a security under the United States Supreme Court’s test. 1946 SEC vs. WJ Howey Co. To my knowledge, no judge has sided with the SEC, including a New Hampshire federal judge who won a notable commission victory last November when he adopted the SEC’s theory that a digital currency is a security when buyers expect the crypto issuer to use its own coin stash to increase the overall value of the currency.

The next big test of the SEC’s crypto regulatory power is expected to come in its closely watched case against Ripple Labs Inc, in which both sides have filed dueling summary judgment motions with U.S. District Judge Analisa Torres of Manhattan. .

Wahi’s dismissal brief filed Monday makes many of the same arguments as Ripples’ summary judgment filings. However, it also provides the first solid explanation of an argument I expect to see more often in SEC crypto cases: SEC enforcement, according to Wahi, is precluded by major issues doctrine recently. articulated by the Supreme Court.

Wahi argues that the new doctrine, enunciated last June in West Virginia v. Environmental Protection Agency, prevents the SEC from using enforcement actions to regulate the uncharted crypto industry without any direction from Congress.

I doubt that argument will change the SEC’s mind. Well let’s see if the judges buy it.

Learn more:

Former Coinbase executive pleads guilty in insider trading case

Until the Ripple decision, the crypto industry will not know the impact of the regulator’s victory over LBRY

The U.S. Supreme Court Just Gave Federal Agencies A Big Reason To Worry

(Reporting by Alison Frankel; editing by Leigh Jones)

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