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My family & I recently visited the Smithsonian’s National Museum of American History, where we joined other sweaty tourists in marveling over the prehistoric (2014) copy of Bitcoin Magazine that has made its way into the “Value of Money” exhibit. The SEC has taken a big interest in crypto as well – and in some ways, from job postings to recent Congressional testimony, they’re making exactly zero attempts to hide it. On the other hand, the agency hasn’t come out and proposed rules.

To that end, late last week, the Commission made a big splash by announcing the first-ever insider trading case involving digital assets, which was predicted earlier this month in this Dechert memo. According to the SEC’s complaint, a former Coinbase product manager – who had access to confidential listing announcements – was allegedly passing tips to his brother and friend to trade in certain crypto assets before Coinbase announced that those tokens would be available for trading on their platform. The DOJ brought a parallel criminal action out of the Southern District of New York, based only on wire fraud allegations (i.e., theft of Coinbase’s information).

This Simpson Thacher memo outlines & elaborates on these key takeaways:

1. SEC takes the position that some of the tokens were securities

2. DOJ & SEC pursue different charges

3. Blockchain anonymity poses no obstacle

4. Crypto policing efforts ramping up

Much of the SEC’s case turns on whether certain tokens that were involved here are “securities” under the Howey test. Because the success (or failure) of those claims will have broader repercussions for the crypto industry – as explained in this Wachtell Lipton memo – lots of folks are up in arms about this case being a “back door” approach to rulemaking. People who want the market to remain unregulated have even gained an ally in another agency that is jockeying for position – with a CFTC Commissioner calling the case “regulation by enforcement.”

Georgetown Law prof Adam Levitin pushed back on that criticism in a Twitter thread that makes some good points. Here’s what the WLRK folks have to say:

While we have previously called for measures to enhance cryptoasset market integrity, the SEC’s allegation that the cryptoassets at issue are securities — against the backdrop of other recent enforcement actions — underscores the need for clarity about whether and how the securities laws apply to particular cryptoassets. While the SEC has promulgated a complex, fact-intensive framework for determining whether a particular cryptoasset is a security, and SEC officials have informally expressed the view that many cryptoasset platforms are trading securities, the agency has generally refrained from opining on the legal status of specific cryptoassets (with notable exceptions including Bitcoin and XRP) and even has avoided stating which cryptoassets constitute securities in a previous enforcement action against a cryptoasset promoter. For their part, a number of centralized U.S. cryptoasset exchanges have explicitly noted that they only list assets that they determine not to be securities.

We express no view here as to the legal status of any of the cryptoassets in question. But the SEC’s allegation that nine of the traded cryptoassets are securities poses important issues beyond this case. Most significantly, it spotlights the risk that cryptoassets may be presumed to be securities — with substantial legal and economic consequences — on the basis of civil enforcement actions in which cryptoasset developers, exchanges, and users are not litigants. That presumption raises a number of practical questions for market participants that typically would be addressed in a rulemaking process under the Administrative Procedure Act. Without such a process, market participants must confront the risks of continuing to develop, list, or transact with cryptoassets with limited transparency on how the SEC may apply the securities laws.

We’re posting memos in the “SEC Enforcement” subsection of our “Crypto” Practice Area. If you aren’t already a member with access to those resources, sign up now and take advantage of our no-risk “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund.

– Liz Dunshee