On November 14, 2023, the Securities Exchange Commission (SEC) issued its enforcement recap for its fiscal year 2023. It was a busy year, indeed, with the SEC filing 784 enforcement actions, obtaining orders for nearly $5 billion in financial remedies, and distributing nearly $1 billion to harmed investors. The crypto industry was among the SEC’s targets for enforcement actions. In its report, the SEC called 2023 a "highly productive and impactful year" for crypto-related enforcement efforts. However, the SEC also suffered several crypto-litigation setbacks during the year, which may force it to rethink its approach to enforcement in this burgeoning industry.
In an effort to keep you apprised of the latest trends in SEC crypto enforcement, here are some recent notable developments.
Coinbase Receives and Responds to Wells Notice; SEC Brings Suit
In March, 2023, the SEC issued a Wells notice to crypto exchange Coinbase, warning the company that it had identified potential violations of U.S. securities laws. A Wells notice is often a final step prior to the SEC bringing formal charges against a company. It generally lays out the SEC’s argument and offers the accused an opportunity to rebut the claims. In this case, the SEC was looking at Coinbase’s crypto staking business, its investment and custody services, and part of its spot trading business.
In April, Coinbase filed its response to the notice, and made it publicly available. In its response, the company asserted that “Coinbase does not list, clear, or effect trading in securities.”
In June, the SEC charged Coinbase with operating its trading platform as an unregistered national securities exchange, broker, and clearing agency, in a complaint filed in the U.S. District Court for the Southern District of New York. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program. In August, Coinbase sought the dismissal of the charges, arguing the SEC is stepping outside of its jurisdiction in suing the crypto exchange. The SEC filed its response in early October, and Coinbase filed a Reply Memorandum later that month. As of the date this post was published, no decision on Coinbase’s Motion to Dismiss was issued.
Coinbase Seeks to Compel SEC to Establish Crypto Rules and Regulations
While defending itself against the SEC, Coinbase has also gone on the attack, filing a Writ for Petition of Mandamus to the SEC with the United States Court of Appeals for the Third Circuit in April, 2023.
Coinbase is asking the court to order the SEC to respond to its July 2022 petition urging the agency to “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods.” This action is still pending. On October 11, the SEC filed a pleading explaining, in regard to Coinbase’s request for crypto rules and regulations, that “Commission staff provided a recommendation to the Commission” on October 10. In response, Coinbase asserted that the SEC’s “laconic” update “ducks this Court’s critical questions.”
The SEC Drops its Case Against Two Ripple Labs Executives
In 2020, the SEC sued Ripple Labs Inc., accusing the company and its executives of conducting a $1.3 billion securities fraud via sales of XRP to retail investors.
In July, a federal judge granted partial victories to both the SEC and Ripple in ruling on cross-motions for summary judgment regarding whether sales of Ripple's digital token XRP violated the federal securities laws. The court held that sales of XRP to institutional investors involved securities under the test articulated by the Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
However, the court ruled that so-called Programmatic Sales on crypto exchanges did not involve securities because the purchasers were not buying directly from Ripple, and therefore could not reasonably expect a profit derived from Ripple's efforts (the third prong of the Howey test). The court also found that other distributions of XRP were not securities (read our comprehensive analysis here).
In a more recent development, in October 2023 the SEC dropped civil charges of aiding and abetting against Ripple executives Christian Larsen and Brad Garlinghouse, who, the SEC had alleged, had aided and abetted Ripple’s violations of the securities laws. However, the SEC will continue pursuing its claims against Ripple, according to the SEC’s filing.
SEC Brings Charges Against Kraken
On November 20, 2023, the SEC charged Payward Inc. and Payward Ventures Inc., known as “Kraken,” with operating a crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency.
The SEC alleges that Kraken provides the traditional services of an exchange, broker, dealer, and clearing agency without having registered any of those functions with the SEC as required by law.
Conclusion
There continues to be a great deal of uncertainty about how the securities laws apply to the cryptocurrency industry. One thing that seems certain is that the SEC will continue aggressive enforcement of this space. We will continue to update you 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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