The Escalation of the Crypto Wars | Proskauer – Corporate defense and litigation

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The gloves are removed. Recent SEC enforcement actions against major crypto exchanges suggest that the SEC has decided that the time is up for the crypto industry as it currently exists in the United States.

After spending years urging industry participants to come register, the SEC has made it clear, by suing some of the biggest players in the space, that it has no intention of condoning the crypto exchange operators offer unregistered trading in the United States, at least for retail investors where the tokens are securities. From the perspective of the SEC, most crypto tokens are securities, so if a company wants to provide the securities-like infrastructure to trade these tokens, it must be registered with the SEC – whether as a exchange (matching buyers and sellers), a broker-dealer (trading cryptos on behalf of others) or a clearing agency (facilitating the settlement of transactions).

At one point we might have thought that the SEC was holding off on further trading because they basically didn’t want to cripple the US crypto industry and US retail investors who put money into the crypto trading. But now, one can’t help but wonder if the SEC thinks there’s no way for crypto intermediaries to comply with the Securities Exchange Act. Virtually no crypto tokens are registered as securities, so if they are considered securities, a registered exchange, broker or clearing agency will find it difficult to provide services to them in a fully compliant manner. exchange law.

The SEC appears to have lost patience and concluded that the easiest course is to continue trading and limit retail crypto trading, rather than undertaking the more laborious (and possibly fruitless) task of identifying unregistered tokens or scam vaporware projects one by one. The SEC does not want to allow another FTX to happen. Regulators may recognize (albeit reluctantly) that they might end up eliminating some innovations while justifying doing so in the interest of preventing further violations.

Coinbase makes an interesting argument in its Wells response – one we’ll likely see in its motion to dismiss to dismiss the SEC action: even though the crypto or tokens could have been part of a securities offering when they were initially sold to the public, they are only tokens – rather than securities – when they trade on Coinbase’s platform. Exchange-traded crypto brands do not entitle traders to profits based on underlying activity at this stage; they are only utilitarian instruments and have value only as assets. So, for example, if a crypto offeror initially only sells to a VC in an unregistered offering pursuant to a Simple Agreement for Future Tokens (SAFT), the transaction is generally compliant because it does not does not require registration. Later, when the venture capitalist sells the tokens after a waiting period, the tokens are no longer part of an “offer”. They are only assets and are no longer subject to the contractual obligations of the offeror or the seller. We’ll see if this argument works at the argument stage, should Coinbase choose to raise it there.

As for the SEC’s position: Chairman Gensler could say that, if Congress had told the SEC that it had no jurisdiction over cryptography, or if Congress had enacted legislation that specifically applied to cryptography, the SEC would back off and do what Congress says. But Congress hasn’t said anything, so if the SEC thinks tokens and other types of crypto are securities under existing law (the Howey test), they have no choice but to apply. this regulatory framework unless and until the law changes. Exchanges and other defendants in crypto lawsuits might need to run out a bit to see if Congress can pull itself together to write new rules or provide a path to compliance.

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