A coalition of cryptocurrency entrepreneurs filed a lawsuit in Texas this week that may force the Supreme Court to address the all-important question of whether the Securities and Exchange Commission has the authority to regulate most digital assets.
The outcome of the battle could determine the future of companies like cryptocurrency exchange Coinbase Global Inc.
Binance and Kraken, as well as a variety of emerging cryptocurrency projects such as Solana SOLUSD,
cardano ADAUSD,
And the MATICUSD polygon,
– All of whom were charged by the SEC with violating federal securities law by failing to register with the agency.
The Texas Crypto Freedom Coalition, a nonprofit trade group, and Lejilex, a cryptocurrency exchange that has not yet launched, filed a complaint in federal court on Wednesday seeking a judicial declaration that sales of digital assets are not securities transactions, the SEC said. And the stock market. Alleged in lawsuits filed against Coinbase, Binance, and Kraken.
Read more: The SEC charges Coinbase for illegally operating an unregistered securities exchange
“We wish we could start our business instead of filing a lawsuit, but here we are,” Mike Wawszczak, co-founder of Lejilex, said in a statement. “The SEC’s rogue enforcement actions targeting our industry have crippled those of us who just want to build legal businesses and technologies.”
The Securities and Exchange Commission declined to comment.
The industry has hired the law firm Clement & Murphy — led by former Solicitor General Paul Clement and litigator Erin Murphy — which specializes in “strategic litigation,” or court cases driven by a desire to effect broader policy change, often through rulings in the Supreme Court.
The case was filed in U.S. District Court for the Federal District Court of the Fifth Circuit, known for its conservative-leaning judges, and was assigned to Judge Reed O'Conner, a George W. Bush appointee known for his rulings that undermined Obamacare and other laws. Liberal reasons.
“The cryptocurrency industry needs to find a way for these very conservative courts to hear these cases, because there is no way the SEC is going to rule,” said Todd Phillips, an administrative law expert who teaches at Georgia State University.
The Texas Cryptocurrency Freedom Coalition and Lejilex want Judge O'Connor to issue a declaratory ruling stating that the exchange does not have to register with the SEC as a securities exchange, so it can avoid being sued by the agency under the same theories. They used to accuse Coinbase of violating the law.
If they succeed, the cryptocurrency industry could seize the initiative from the SEC, which up to this point has been able to pick and choose when and where digital asset companies fight in court, according to a source familiar with the plaintiffs' strategy.
Even if the SEC succeeds in convincing other district courts in New York, Washington, D.C., and California that cryptocurrency exchanges violate securities laws, a favorable ruling in the Fifth Circuit would create a position the Supreme Court would likely have to take up the case.
The Supreme Court is dominated by a 6-3 conservative majority that has been eager to issue rulings that have weakened the regulatory state in recent years, including a ruling that blocked the EPA's ability to combat climate change by regulating energy companies, and another. Who said the leadership structure of the Consumer Financial Protection Bureau was unconstitutional.
“The cryptocurrency industry is trying to manufacture a divided circuit so that the Supreme Court essentially has to take the case,” Phillips said.
The basic argument in the lawsuit is that the SEC is misinterpreting case law on the issue of what constitutes an “investment contract.”
Investment contracts are securities under federal law, and those who issue securities or operate exchanges that sell securities must register with the Securities and Exchange Commission and file with its regulatory system.
See also: Blockchain firm LBRY tries to rally sector against SEC; Critics claim 'crypto suppression programme'
The SEC has argued that digital assets like Solana or Cardano are securities because investors buy these tokens and expect to profit based on the efforts of the entrepreneurs behind these projects.
The lawsuit against Lejilex says the SEC ignores the fact that for a digital asset to qualify as an investment contract, the purchaser of that asset must grant some sort of contractual claim on the proceeds earned by the issuers of the asset — which is not the case for Solana, Cardano, or Any of the other tokens that the SEC has described as securities in its cases against cryptocurrency exchanges.
Under the SEC's view of the law, plaintiffs argue that the agency would be allowed to regulate collectibles such as limited-use sneakers or baseball cards as securities, because investors often buy those products with the expectation that their value will increase based on value. Promotional efforts of collectibles manufacturers.
The SEC will get a chance to respond to Lejilex's claims in a filing of its own, which can be expected in the coming months, and the court will likely rule on the case later this year.
