- Crypto.com has filed suit against the SEC in a Texas court.
- The exchange wants to block the regulator from enforcing securities laws against it.
Crypto.com is suing the Securities and Exchange Commission, following an investigation into the company by the markets watchdog.
At issue? So-called “network tokens” including those of Solana, Binance, Cardano, and Algorand that are bought and sold on Crypto.com’s platform.
“This unprecedented action by our company against a federal agency is a warranted response to the SEC’s regulation-by-enforcement regime,” Crypto.com CEO Kris Marszalek posted on X on Tuesday.
This unprecedented action by our company against a federal agency is a warranted response to the SEC’s regulation by enforcement regime which has hurt more than 50 million American crypto holders.
— Kris | Crypto.com (@kris) October 8, 2024
The exchange is asking a federal judge to declare that the tokens — along with six more — transacted on its platform are not securities, and to bar the SEC from enforcing securities laws against the company.
A complaint filed by Foris DAX, the company behind Crypto.com, in a Texas court says the company has been under investigation by the regulator since February 2023, when it sent it subpoenas.
In August, Crypto.com received notice that the regulator’s enforcement division will recommend action.
Future returns
Crypto.com is far from alone. The SEC under Chair Gary Gensler has brought a slew of enforcement actions against crypto’s biggest players, including Coinbase, Consensys, and Kraken.
These cases hinge on the SEC’s assertion that tokens issued by networks like Cardano or Solana are securities, even when sold on exchanges, and therefore fall under the SEC’s jurisdiction.
For an asset to become a security, it has to meet certain criteria.
Essentially, no asset is a security in and of itself until it’s sold along with the promise of future returns.
Crypto.com operates in the secondary market — it’s an exchange that makes tokens available on its platform to buyers and sellers, but makes no promises about the tokens.
The tokens were issued by their respective networks — Cardano and so on — to reward their operators and users.
The SEC has decided those are securities, the filing said, but that has little to do with Crypto.com. The exchange merely buys the tokens and then makes them available to trade on its platform, it said.
The SEC has historically agreed that secondary market sales of network tokens don’t count as securities, the filing said.
It was only as Gensler took office that the SEC’s attitude to enforcement actions against crypto businesses became “increasingly aggressive, unilateral, and expansive assertion of authority over secondary-market sales of network tokens and the broader digital asset industry,” the filing said.
The SEC has argued that network tokens are securities because their backers and builders have promoted them with promises that investors will profit from them.
That’s true whether the token was bought directly from the issuer, or on a secondary market like an exchange. Either way, an investor is expecting to profit from the network’s growth.
Mixed results
As the SEC’s suits against crypto firms are starting to make their way through the courts, the regulator has scored some early wins.
A judge in Coinbase’s case sided with the SEC and allowed the case to go to trial, saying crypto transactions on the exchange did appear to be securities.
On the other hand, as the Crypto.com filing notes, a judge in a separate lawsuit against Binance said the SEC had not successfully argued that a secondary market buyer would expect their money to go to developing the network behind the token.
Reach out to the author at joanna@dlnews.com.