The SEC’s Aggressive Tack on the Cryptocurrency Industry

December 12, 2023

Insights, Securities Law

On June 6, 1944, the 82nd Airborne Division went to war, dropping infantrymen from the skies above France. On the sixth of June of ’23, the SEC waged its own version of war against the cryptocurrency industry. In perhaps its most aggressive move against the industry to date, the SEC filed an enforcement action against Coinbase for acting as unregistered broker, exchange, and clearing agency one day after filing its lawsuit against Binance on similar grounds. These allegations depend, of course, on the regulator’s view that crypto assets qualify as securities.

Unlike the invasion of Normandy, the Commission’s aggressive tack on the cryptocurrency industry should come as no surprise. On April 6, the Commission’s Investor Advisory Committee sent a letter to Chair Gary Gensler urging it to intensify its aggressive enforcement on crypto players that offer unregistered securities. The letter averred that “virtually all, if not all, crypto tokens are securities and that they, as well as the platforms and custodians dealing with them, are subject to regulation under the federal securities laws to protect investors.”

The Commission’s 101-page complaint filed last week in the Southern District of New York offers numerous explicit examples of how Coinbase’s operation allegedly runs afoul of federal securities legislation. Citing the popular Coinbase Prime and Coinbase Wallet services, the complaint includes screenshots of Coinbase’s own website as support for its allegations. The Commission also takes aim at the Coinbase Staking Program, a passive investment scheme marketed as earning investors “up to 6% APY on your crypto,” according to the SEC.

For its part, Binance has publicly acknowledged that its platform was not registered or licensed as a broker-dealer, national securities exchange, or alternative trading system, and that it has no plans to register or rely on any exemption from such registration or license for any of the assets available for sale on its platform.

For purposes of prevailing on its Exchange Act claims, the SEC argues that it need only establish that Coinbase has engaged in activities relating to a single crypto asset security during the relevant period. Nevertheless, the SEC sets forth details regarding a non-exhaustive list of 13 “Crypto Asset Securities” that are trading unlawfully on Coinbase (and presumably other exchanges). Of those, Solana (“SOL”), Cardano (“ADA”), Polygon (“MATIC”), Sandbox (“SAND”), Axie Infinity (“AXS”) and Filecoin (“FIL”) also appear in the SEC’s lawsuit against Binance.

Unsurprisingly, these tokens suffered a precipitous drop in value and now face an impossible fight to return to prominence. ADA, for example, reportedly lost 6% of its value in the 24 hours after being named in the SEC Complaint. These losses and the Commission’s enforcement actions will likely spur private suits that will be challenging to defend in the face of regulatory actions and, potentially, criminal investigations. Avid crypto followers are aware of reports that the token Solana lost over $50 billion in value in 2022, much of that due to its close relationship with FTX founder, Sam Bankman-Fried. The fallen crypto financier famously said of Solana tokens, “Sell me all you want. Then go f— off.”

The SEC makes clear that this is not an exhaustive list of crypto asset securities, but holders of those securities should be leery of the volatility that is sure to follow. Of course, after filing lawsuits against Binance and now Coinbase, every crypto platform and NFT and every broker, dealer, promoter, and issuer of those assets should be calling their attorneys as well.

Jean-Pierre Bado is an associate with the law firm of Fridman Fels & Soto, PLLC and a member of the firm’s Securities Litigation and SEC Enforcement Practice Group. The Group is led by partner Alejandro Soto, a former senior official with the SEC.