THE LANDSCAPE OF GOVERNMENT ENFORCEMENTprivate litigation and federal and state regulation of DIGITAL ASSETS, BLOCKED AND RELATED TECHNOLOGY is in constant development. Each quarter, Ropes & Gray lawyers analyze government enforcement and private litigation, rulings, settlements and other important developments in this area. We distill the flood of industry headlines so you can identify and manage risk more effectively. Below are the takeaways from this quarter’s review.
ENFORCEMENT LANDSCAPE
SEC and CFTC Target Industry’s Largest Exchanges Continue Heavy Enforcement Activity. On the heels of last quarter’s dramatic collapse of FTX, then the second-largest crypto exchange in the world by trading volume, the Securities and Exchange Commission (“SEC”) and the Commodities Futures Trading Commission (“CFTC”) have turned their sights on some of the industry’s biggest and most established players, conducting what some commentators have called a “crypto carpet bombing.” In the first quarter of 2023, the SEC and CFTC collectively filed (or strongly indicated they would bring) enforcement actions against three of the industry’s best-regarded crypto exchanges: Coinbase, Binance, and Kraken. 1 (Another major exchange, KuCoin, was recently sued by the New York Attorney General.) On top of these headline-grabbing lawsuits, the SEC and CFTC have collectively filed over a dozen other crypto-related actions this quarter against individuals and entities. Read on for more.
1. ALLEGED UNREGISTERED TOKENS AND TOKEN PLATFORM UPDATES
- SEC HIT COIN BASE WITH WELL ALERT. On March 22, 2023, SEC staff issued a Wells notice stating that staff is prepared to recommend an enforcement action against Coinbase based on Coinbase’s alleged violations of the securities laws, including by allegedly operating as an unregistered securities exchange, an unregistered broker-dealer, and an unregistered transfer agent . The Wells Notice itself provided little detail beyond the proposed charges, but in its 8-K filing, Coinbase claimed that the alleged violations relate to “aspects of the company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet.” Furthermore, according to a Coinbase blog post, the SEC declined to identify any specific products or assets on the Coinbase platform it believes may be securities. Coinbase’s blog post also reported that during the SEC’s nine-month investigation into the matter, Coinbase attempted to register with the SEC by presenting two registration models, and the agency was initially open to the idea. But before the SEC was about to provide feedback on the registration models, the agency “abruptly interrupted…and told [Coinbase] they would go back to an enforcement investigation.” Coinbase maintains that it does not list or offer products that are securities under any legal standard, including the Supreme Court’s Howey test.
