June 8, 2023
SEC Crypto Crackdown: Where To Begin?
I’ve been dragging my feet on writing about the SEC’s big crypto enforcement actions & related news because I had a feeling that there would be more to come. Now there’s been more activity than I bargained for, so I’m just going to recap what’s happened in the past week or so:
– Last week: The SEC announced that former Coinbase manager and his brother agreed to settle insider trading charges.
– Also last week: The Chairs of the House Committees on Financial Services & Agriculture published a 162-page discussion draft of legislation that would define CFTC and SEC jurisdiction over cryptoassets (commodities vs. investment contracts, respectively), create a new disclosure regime specific to the risks surrounding digital assets, define conditions for registration off-ramps and exemptions, establish a joint CFTC-SEC advisory committee, and more. Here’s the 8-page summary.
– Monday: The SEC announced 13 charges against Binance – the world’s largest crytpo exchange – along with its US arm and its founder. Here’s the 136-page complaint. You have probably seen the quote.
– Tuesday: The SEC announced charges against Coinbase – the largest crypto exchange in the US and the petitioner in a detailed request for rulemaking – for operating as an unregistered securities exchange, broker and clearing agency. Here’s the 101-page complaint. Unlike Binance, the SEC hasn’t alleged much in the way of fraud. Matt Levine’s column has a good comparison of the Binance and Coinbase approaches to compliance and the SEC’s complaints against each of them.
– Also Tuesday: The SEC announced that it had filed an emergency motion for a TRO to freeze certain Binance assets and prevent destruction of records, among other requests. Here is commentary from John Reed Stark, who was formerly with the SEC and has been calling for enforcement on crypto from various regulators for quite some time.
Here is Matt Levine again on the evolution of the SEC’s crypto enforcement since 2017. He describes the early days as:
The SEC’s 2017ish ICO crackdown was very much a ’33 Act crackdown: People were raising money by selling scammy stock-like tokens, and the SEC shut down their scams, one at a time.
And one result of this approach is that Coinmarketcap.com lists 10,408 crypto tokens, and only a handful of them have been sued by the SEC for doing illegal securities offerings. Maybe that’s fine! Maybe the SEC’s crackdown on ICOs deterred 30,000 other, scammier crypto projects from launching; maybe the 10,000 current crypto tokens are all pretty good and not scammy.
That’s different than today’s approach, which is coming under the ’34 Act:
What can the SEC do about it? Well, it can go sue thousands of crypto projects, but that is hard not only because there are thousands of them but because many will be decentralized and/or foreign enough that they are hard to sue.
Also some of them didn’t do anything wrong: Solana, let’s say, did do a securities offering of SOL tokens, but legally, selling them to venture capitalists in private placements subject to appropriate SAFTs and lockups. The fact that those tokens now trade publicly, with less disclosure and fewer investor safeguards than the SEC would like, is, from the SEC’s perspective, unfortunate. But it’s not exactly Solana’s fault, or rather it is Solana’s fault but in a perfectly legal way.
But what the SEC can do is sue crypto exchanges. What it can do is try to shut down Coinbase Inc., the biggest US crypto exchange, and shut Binance, the biggest global crypto exchange, out of the US market. And it can go after other companies — Bittrex, Kraken, Gemini — that offer crypto trading to US customers. Because if it is illegal to operate a crypto exchange in the US, then US customers won’t be able to trade crypto, which means that they will be protected from the bad aspects — the scams, the lack of disclosure, the lack of investor protections — of crypto.
The column goes on to explain that while the ’33 Act analysis is still important to the current enforcement arguments, there may be nuances that affect where all this lands. John Reed Stark and lots of others think the SEC’s cases are strong. This Reuters article reports that counsel for the defendants in this week’s cases includes lawyers from Wachtell Lipton, Sullivan Cromwell, Latham, Gibson Dunn and Wilmer Hale. So for those of us watching from the sidelines who enjoy the technicalities of securities law, there may be opportunities to geek out when we see the arguments.
– Liz Dunshee