On June 6, 2023 the United States Securities and Exchange Commission (“SEC”) sued a major cryptocurrency platform (the “Platform”), accusing it of operating as an unregistered securities exchange, broker, and clearing agency. The SEC also charged the Platform for failing to register the offer and sale of its crypto asset staking-as-a-service program. The lawsuit comes just one day after the SEC charged crypto exchange Binance and its founder Changpeng Zhao with a variety of securities law violations.
According to the SEC, the Platform has been unlawfully facilitating the buying and selling of crypto asset securities since at least 2019. The SEC’s complaint includes a non-exhaustive list of thirteen assets traded on the Platform that it argues are securities. When asked about the value of these coins in a June 6, 2023 interview with CNBC, SEC Chair Gary Gensler pushed back on the idea of crypto coexisting alongside fiat currency. Gensler stated, “we don’t need more digital currency. We already have digital currency. It’s called the US dollar. It’s called the Euro. It’s called the Yen. They’re all digital right now. We already have digital investments.”
In its complaint, the SEC also alleges that the Platform’s staking-as-a-service program constitutes an unregistered securities offering. According to the SEC, the program permits users to earn profit through the proof of stake mechanisms of certain blockchains.
The SEC further alleges that the Platform commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions, which in turn deprived investors of significant protections, including routine inspection by the SEC and recordkeeping requirements. The Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, warned that crypto companies cannot “ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great.”
On March 22, 2023, the SEC had issued a Wells notice to the exchange, notifying the Platform of charges that the SEC intended to bring against them. On April 24, 2023, the exchange filed a petition for a writ of mandamus in the United States Court of Appeals for the Third Circuit in an effort to compel the SEC to provide clarity as to the regulations that apply to the crypto industry. See our previous post on the Platform’s response. The Platform and others in the crypto industry have argued that the SEC is regulating by enforcement and has not provided clear expectations for governance.
While the SEC’s action against the Platform was not surprising given the prior Wells notice, coming one day after the SEC’s action against Binance, it certainly was dramatic. Further, in the absence of Congressional action to pass crypto regulations, the new wave of aggressive activity by the SEC and the outcome of those actions is likely to shape the regulatory framework of crypto in the United States.