SEC Drops Case Against Crypto Exchange
Commentary by Gage Raju-Salicki
The SEC filed a joint stipulation with a crypto exchange to dismiss, with prejudice, the SEC's ongoing civil enforcement action against it.
Before the US District Court for the Northern District of California, the SEC had alleged that the crypto exchange operated as an unregistered broker-dealer, exchange and clearing agency in connection with crypto asset securities trading. (See previous coverage.) Under its analysis of the issues under the Howey test, the Court found the crypto tokens traded on the exchange were not securities, however, contracts surrounding their sale could be considered investment contracts and thereby are subject to SEC regulation. As a result, the Court found that the SEC's allegations were sufficient to allow the case to proceed to trial.
In the joint stipulation, the parties acknowledged the SEC's launch of the crypto task force "dedicated to helping the Commission further develop the regulatory framework for crypto assets." The parties said, "in light of the foregoing, and in the exercise of its discretion and as a policy matter, the Commission believes the dismissal of this case is appropriate."
Commentary
The SEC has been dropping exchange suits left and right—a sign that the agency is moving past the era of regulation by enforcement. That isn't to say that exchanges and protocols are civil lawsuit-free. Despite one positive ruling in the Second Circuit, more private suits are likely to come. Securities Act Section 12(a)'s fractured jurisprudence still leaves open the possibility of individual judges finding that some cryptocurrencies are securities, and ultimately finding liability against protocols and exchanges. In effect, there may be—absent a market structure bill from Congress—even less regulatory clarity for crypto market participants at present: the SEC was just one entity, versus the entire federal judiciary's multiplicity of decisionmakers.
That's not to say there will never be regulatory clarity: Congress is working on a stablecoin bill; there are rumors of market structure legislation; and the SEC's Crypto Task Force is hard at work determining securities status and much more. The fact that these exchange suits are being withdrawn is further evidence of change. Moreover, future private suits are inevitably going to be focused on consumer protections and individual recovery, limiting the universe of potential claims and impacts.
As such, for market participants there are no novel developments—outside of proof-of-work and meme coin guidance from the Division of Corporate Finance—to cause a turn away from innovation on the regulatory front.