Crypto.com filed suit against the SEC in a Texas court. Seeking to prevent the enforcement of securities laws against the exchange regulator.
Crypto.com is suing the Securities and Exchange Commission after the markets watchdog investigated the company.
In trouble? So-called “network tokens” including Solana, Binance, Cardano and Algorand are bought and sold on the Crypto.com 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 Chris Marszalek posted on Tuesday X.
This unprecedented action by our company against a federal agency is a warranted response to the SEC's deregulation through an enforcement regime that has hurt more than 50 million American crypto holders.
— Chris | Crypto.com (@kris) October 8, 2024
This unprecedented action by our company against a federal agency is a warranted response to the SEC's regulation through an enforcement regime that has hurt over 50 million American crypto holders.
— Chris | Crypto.com (@kris) October 8, 2024
The exchange is asking a federal judge to declare that six other tokens traded on its platform are not securities and prevent the SEC from enforcing securities laws against the company.
A complaint Filed by Foris DAX, the company behind it Crypto.comA Texas court said the company has been under investigation since February 2023 by the regulator, which has sent subpoenas.
In August, Crypto.com The regulator's enforcement arm has received notice recommending action.
Future returns
Crypto.com is not alone. The SEC, under Chair Gary Gensler, has brought several enforcement actions against crypto's biggest players, including Coinbase, Consensus, and Kraken.
These cases hinge on the SEC's argument that tokens issued by networks like Cardano or Solana are securities even though they are sold on exchanges and therefore fall under the SEC's jurisdiction.
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For an asset to become a security, it must meet certain criteria.
Essentially, no asset has security until it is sold with the promise of future returns.
Crypto.com operates in the secondary market – an exchange that makes tokens available on its platform to buyers and sellers, but does not make promises about the tokens.
Tokens are issued by their respective networks – Cardano and so on – to reward their operators and users.
The SEC has determined them to be securities, the filing said, but has little to do with it Crypto.com. The exchange claims to simply purchase tokens and then make them available for trading on its platform.
The SEC has historically agreed that secondary market sales of network tokens are not considered securities, the filing said.
The filing states that the SEC's stance on enforcement actions against crypto businesses only after Gensler took office has been “overly aggressive, arbitrary and has broad authority over secondary-market sales of network tokens and the broader digital asset industry.”
The SEC argued that network tokens are securities because their backers and builders promote them with promises that investors will profit from them.
That is true whether the token is purchased directly from the issuer or on a secondary market such as an exchange. Either way, the investor hopes to profit from the growth of the network.
Mixed results
As the SEC's lawsuits against crypto firms begin to make their way through the courts, the regulator has scored some early victories.
A judge in the Coinbase case sided with the SEC and allowed the case to proceed, saying crypto transactions on the exchange appear to be securities.
On the other hand, according to notes filed by Crypto.com, a judge in a separate lawsuit against Binance said the SEC did not successfully argue that a secondary market buyer could expect their money to develop the network behind the token.
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