Over the past few years, the Securities and Exchange Commission (SEC) has claimed increasing authority in the regulation of digital assets.  Many in the crypto community have complained that the SEC is regulating by enforcement, but few have challenged the SEC’s ability to do so.  That may be changing.  On April 27, a major cryptocurrency exchange platform (the “Platform”) publicized its response to a Wells notice issued by the SEC to the exchange in March. A Wells notice is a letter sent by the SEC notifying a party of the charges that the SEC intends to bring against them. The notice gives the party an opportunity to respond to the potential charges. The SEC alleged that the Platform was operating as an unregistered exchange, listing unregistered securities in the form of certain digital assets, and offering certain services, such as staking and wallet activity, in possible violation of the securities laws.

In response, the Platform argued that it does not list, clear, or effect trading in securities. The Platform also criticized the SEC for failing to provide regulatory clarity, noting that it has made “extensive efforts to engage with” the SEC since its registration two years ago, but that the Commission has refused to “respond to requests for clarity or rulemaking.” Further, the Platform argued that the SEC’s accusations are predicated on a misapplication of the Howey test. The Howey test stems from a Supreme Court case from 1946 that is often used to determine whether an asset can be classified as a security and therefore be subject to U.S. securities laws.

The Platform is not alone in its criticism of the SEC’s regulation by enforcement approach to crypto assets and consternation with the SEC’s failure to provide clear rules and expectations for governance. In recent months, the SEC has brought enforcement actions against numerous crypto companies and executives and SEC Chair Gary Gensler has indicated his desire to increase regulation in the space. Thus far, few crypto companies have dared to fight the SEC.  The Platform’s aggressive response indicates that some crypto companies are ready and willing to fight back.