Crypto.com confirmed Tuesday that it received a Wells notice from the U.S. Securities and Exchange Commission and went on the offensive in filing a complaint in a federal district court in Texas against the agency, arguing that it “overstepped its authority by claiming most crypto transactions are securities.”
In filing the complaint, the plaintiff, Foris DAX Inc., also known as Crypto.com, is seeking to prevent the SEC from expanding its jurisdiction over secondary market sales of certain tokens sold on the company’s platform, “despite bipartisan indications that the next Administration will take a more constructive and effective approach to advancing crypto in the U.S.”
“For now, improper SEC enforcement actions are part of the process of operating a legitimate and licensed crypto business in the U.S.,” Crypto.com alleged in a statement on its website. “While this is an unprecedented move for our company to file suit against a federal agency, actions by that agency towards our industry have left us no other choice.”
Tonya M. Evans, a leading authority in digital asset litigation and professor at Penn State Dickinson Law who is not involved in the matter, highlighted in an interview the bold stance that Crypto.com took in filing the complaint rather than waiting to be sued or reacting defensively.
“The outcome of this case could have far-reaching implications, not just for Crypto.com, but for the broader crypto industry, particularly as it relates to secondary-market transactions and how they’re regulated,” Evans said.
In the complaint, Crypto.com alleged that on Aug. 22, the SEC staff sent a Wells notice stating that it intends to recommend that the SEC bring an enforcement action against Crypto.com, without specifying which tokens sold on the platform are “crypto asset securities,” a term the SEC wrote in September it would no longer use.
Crypto.com argued in the complaint that the “targeted network tokens” at issue, in this case, are not securities under the Securities Act of 1933 or the Securities Exchange Act of 1934, and that the SEC has conceded that fact in multiple administrative and federal court cases involving the plaintiff’s competitors.
“Rather than relying on statutory authority or undertaking notice-and-comment rulemaking, the SEC invented the term, ‘crypto asset security,’ out of whole cloth to expand its jurisdiction over the digital asset industry,” Crypto.com wrote. “The term has no foundation in the Securities Act or Exchange Act. Nor does it resemble any financial instrument defined by those laws.”
Now, the SEC is threatening enforcement action against Crypto.com, the company argued in the complaint, despite the rule being inconsistent with federal law, exceeding the agency’s statutory authority, and violating the Administrative Procedure Act.
In doing so, Crypto.com has become the latest industry player to sue the SEC, following in the footsteps most recently of law professors Brian Frye and Jonathan Mann, who asked a federal district court in New Orleans to clarify whether NFTs qualify as unregistered securities under the jurisdiction of Wall Street’s largest regulator.
And instead of heeding calls to participate in formal rulemaking, the SEC has “sought to expand its regulatory scope by enforcing the rule through litigation,” Mark Rasmussen, the lead attorney and a partner at Jones Day in its Dallas office, argued in the complaint filed on behalf of Crypto.com, which is pending in the U.S. District Court for the Eastern District of Texas.
Peter Eberle, president and chief investment officer of Castle Funds and former co-head of trading on the Pacific exchange for Goldman Sachs, said the SEC’s continued aggression toward crypto firms will stifle innovation in the U.S. and lead more firms to focus on growth in territories with clear regulations.
“Congress must act and give the SEC clear guidance,” said Eberle, who is not involved in the case. “The SEC’s current enforcement attitude calls into question whether comic books, baseball cards or any other collectible is a security when purchased with an investor’s hope for future financial gain.”