In the unpredictable world of cryptocurrency, there is one thing you can almost certainly count on: new and notable developments in crypto litigation and SEC enforcement.
Coinbase and the SEC Continue to Slug it Out in Court
In June 2023, the Securities Exchange Commission (“SEC”) filed a lawsuit in the U.S. District Court for the Southern District of New York alleging that Coinbase evaded securities regulations by failing to register with the SEC as an exchange, clearing agency, or broker.
The parties in January 2024 had oral argument over the central issue in the case: are crypto assets securities?
The SEC contends that they are and therefore that there are securities transactions that are taking place on Coinbase. As a result, the SEC argues, Coinbase is operating as an unregistered exchange.
During oral argument, Coinbase countered with an argument by analogy, stating that buying cryptocurrency is akin to buying collectibles like Beanie Babies, as opposed to a stake in a company.
The judge’s ruling on this issue is pending. As we have stated previously, the question of whether crypto tokens are securities has divided courts, with a ruling this past summer that exchange sales of Ripple Labs XRP token weren’t subject to SEC jurisdiction, while another judge reached the opposite conclusion in a case against Terraform Labs Pte.
Crypto Company Goes on Offense to Make an “Impact”
A crypto trading platform called Lejilex is attempting to turn the tables on the SEC by filing its own lawsuit against the agency. The lawsuit, with the Crypto Freedom Alliance of Texas as a co-plaintiff, contends that the sale of digital assets on secondary markets does not qualify as securities transactions, thereby exempting them from the regulatory purview of the SEC. In other words, they’re fighting the same battle as Coinbase, but doing so as a plaintiff versus as a defendant.
This sort of litigation is often called “impact litigation” (or “strategic litigation”), which refers to the practice of using legal action to bring about significant changes in the law, practice, or public awareness through precedent-setting court cases. These lawsuits are typically aimed at creating broad changes affecting large groups of people rather than just resolving the specific legal issues faced by the plaintiffs involved in the case.
New York Seeks Billions from Digital Currency Group
It’s not just the federal government that is cracking down on crypto.
In October, New York Attorney General Letitia James filed a lawsuit alleging that Digital Currency Group, Genesis Global Capital, and Gemini Trust (run by Cameron and Tyler Winklevoss), defrauded investors out of more than $1 billion. The allegations focus on the Gemini Earn program, through which customers lend crypto assets to Genesis Global Capital in exchange for a high rate of return. The attorney general alleges that Gemini lied to investors by assuring them that investing with Genesis through their Gemini Earn program was a low-risk investment. In February, the lawsuit was expanded, and now alleges that damages stemming from fraud exceed $3 billion.
Conclusion
There is still considerable uncertainty about how the securities laws apply to the cryptocurrency industry. One thing that seems certain is that litigation, initiated by governments as well as between private parties, will continue to rage in the crypto domain. We will keep you updated with new developments.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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