SEC drops suits, forms anti-fraud unit, takes more meetings

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Crypto operators have yet to take down their Christmas stockings because the United States Securities and Exchange Commission (SEC) is preparing to make every day a Crypto Christmas.

• Coinbase celebrates SEC victory
• Ditto OpenSea, Robinhood, and Uniswap
• Ripple, Kraken, et al. wondering why their suits are still active
• SEC turfing regional directors, launching anti-fraud cyber unit
• SEC’s Peirce issues crypto manifesto
• Crypto task force meeting with everybody

On February 21, the Coinbase (NASDAQ: COIN) digital asset exchange issued a blog post claiming that “SEC staff has agreed in principle to dismiss its unlawful enforcement case against Coinbase, subject to Commissioner approval.” The SEC has yet to confirm or deny this claim, but a vote by the three sitting Commissioners is expected this week.

The SEC filed a complaint against Coinbase in June 2023, accusing the exchange of operating as an unregistered securities exchange, broker, and clearing agency. But with former Chairman Gary Gensler out of the picture, the SEC’s new regime—despite still waiting on confirmation of new Chair Paul Atkins—has signaled its intention to scrap most if not all of its crypto litigation, regardless of the strength of some of these suits.

Coinbase’s blog didn’t spare the gloating, claiming the case “should never have been filed in the first place” and hailing the dropped charges as “a victory” for “the United States and individual freedom.” Coinbase said the “millions in legal costs and fees” it spent defending itself were worth it, failing to mention the tens of millions Coinbase spent ensuring the election of a pro-crypto president who can tell the SEC what to do.

Echoing this view was Amanda Fischer, a former SEC chief of staff when the Coinbase suit was launched, who told Politico that “[t]his case was won by the lobbyists, not the lawyers.” Fischer said Coinbase “had a conflicted business model that failed to comply with basic investor protections” and warned that “[i]nvestors should exercise caution, as industry and regulators have been clear that Americans are now on their own.”

Summoning the grandiosity for which he’s become infamous, Coinbase CEO Brian Armstrong claimed the SEC suit had seen “irreparable harm done to the country,” which will likely be news to the country outside Brian’s corner office.

While other crypto sector luminaries were quick to celebrate Coinbase’s victory, Dennis Kelleher, CEO of the Better Markets consumer protection watchdog, issued a statement slamming the SEC for “unilaterally disarming” and moving “from investor protector to a financial industry cheerleader.”

Kelleher said the SEC “used to enforce the law without fear or favor but is now favoring the crypto industry and fearing billionaire crypto kingpins who are publicly belittling the agency.” Kelleher warned that this surrender “will embolden lawbreakers” and predicted the SEC would be remembered as “an enabler if not a key driver of the next catastrophic crash.”

OpenSea, Robinhood, Uniswap win SEC reprieves

While Coinbase’s victory parade was swiftly overshadowed by news of the $1.4 billion hack of rival exchange Bybit, other crypto operators are celebrating their own regulatory reprieves.

The same day that Coinbase announced the end of its legal woes, Devin Finzer, CEO/founder of the non-fungible token (NFT) marketplace OpenSea, tweeted that the SEC was “closing its investigation” into the platform. The SEC sent OpenSea a Wells notice last August based on its belief that the crudely drawn, utility-bereft monkey JPEGs sold on OpenSea are securities.

On February 24, crypto-friendly online brokerage Robinhood (NASDAQ: HOOD) announced that the SEC “had concluded its investigation and did not intend to move forward with an enforcement action” against its Robinhood Crypto unit.

The SEC sent Robinhood a Wells notice last May, indicating that the regulator was planning an enforcement action based on its belief that some of the tokens Robinhood was offering to the public were unregistered securities.

Robinhood Markets chief legal officer Dan Gallagher applauded the SEC’s decision to close the investigation, which he said “never should have been opened.” Gallagher said he’d warned the SEC that “any case against Robinhood Crypto would have failed.”

Speaking of failure, Robinhood reached a $45 million settlement with the SEC last month over regulatory shortcomings in its non-crypto operations. These included failing to timely investigate suspicious transactions, failing to comply with policies intended to address abusive short-selling practices, and failing to preserve off-channel electronic communications.

Earlier this month, Robinhood’s Q4 earnings report showed revenue doubling year-on-year, in large measure due to a sevenfold increase in crypto transaction revenue. Despite the boffo numbers, Robinhood’s share price has fallen by around one-third in the past two weeks.

On February 25, Uniswap Labs announced that the SEC’s probe into its  decentralized finance (DeFi) platform “has officially been closed, and the SEC is taking no enforcement action.” Uniswap called the news “a huge win for DeFi” and confirmation that “the technology we build is on the right side of the law, and our work is on the right side of history.”

Last May, Uniswap announced that it had received a Wells notice based on the SEC’s belief that “the Uniswap Protocol is an unregistered securities exchange controlled by Uniswap Labs, that the Uniswap interface is an unregistered securities broker-dealer, and that the UNI token is an investment contract.”

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So where’s our ‘get out of jail free’ cards

Elsewhere, the SEC has voluntarily dismissed its own appeal of a federal court summary judgment from last November. The U.S. District Court for the Northern District of Texas had sided with the Blockchain Association (BA) and the Crypto Freedom Alliance of Texas (CFAT), who objected to the SEC expanding its definition of ‘dealer’ to include DeFi platforms such as liquidity providers.

On February 19, the SEC filed to voluntarily dismiss the appeal filed in the wake of that November ruling. The plaintiffs didn’t oppose the motion, which will see each side pay their own costs. The BA issued a statement hailing its “complete victory” over the SEC and a ruling that “sounds the death knell for the dealer rule.”

With the SEC throwing in the litigation towel in nearly all its active cases, onlookers are wondering why the regulator hasn’t shown similar mercy to XRP-issuer Ripple Labs. The Ripple suit, which dates back to December 2020, has gone back and forth in the courts, with both sides collecting procedural victories and losses along the way.

Fox Business reporter Eleanor Terrett claims the SEC is simply proceeding according to the dictates of their court calendar, requesting ‘pauses’ as the next court date in each suit looms. Ripple’s next ‘due date’ isn’t until mid-April, so patience—not something that crypto bros have in abundant supply—is a virtue.

Other remaining probes—both those at the active litigation phase and those stuck in Wells notice limbo—that are similarly waiting for updates include market-maker Cumberland DRW, the Kraken exchange, and the Ethereum-focused software outfit Consensys.

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Out with the old, in with the new

Given its lack of interest in policing crypto, it’s perhaps no surprise that the SEC is cutting its workforce. On February 24, Reuters reported that the agency had notified 10 regional directors that their jobs would soon be eliminated, although the SEC reportedly doesn’t have any plans—at least, not yet—to shutter these offices completely.

The news broke just one week after an ‘X’ account affiliated with Elon Musk’s controversial Department of Government Efficiency (DOGE) asked the public for “insights on finding and fixing waste, fraud and abuse relating to the [SEC].” Reuters reported that SEC senior staff had a call on February 20, during which they revealed that SEC staff were liaising with DOGE on this subject.

Perhaps conscious of the growing public perception that the SEC is planning to take the next four years off, last week saw the agency announce the creation of a new Cyber and Emerging Technologies Unit (CETU). The new unit, led by SEC attorney Laura D’Allaird, has been given a brief to “focus on combatting cyber-related misconduct and to protect retail investors from bad actors in the emerging technologies space.”

The CETU replaces the existing Crypto Assets and Cyber Unit, so this is something of a rebrand rather than a full-fledged declaration of war on fraud. And its mission will also be, in the words of SEC acting chair Mark Uyeda, to “facilitate capital formation and market efficiency by clearing the way for innovation to grow.” What about innovative fraud? Is that still okay?

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Let us not talk falsely now

Peirce claimed that the oft-cited “lack of regulatory clarity” vis-à-vis digital assets “has fostered an environment in which jokers and thieves thrive, while legitimate crypto projects struggle. This document is part of the effort to change that environment.” Peirce stressed that the views contained in the document were her own and not necessarily those of her fellow commissioners or the SEC as a body.

Assuming you have the time/interest, the document really should be read in its entirety. The discussion involves everything from the thorny issue of whether a particular token is a security under the criteria of the Howey test; the prospect of Making Initial Coin Offerings (ICO) Great Again; allowing new blockchain token projects to be centralized AF initially in the hope that they’ll honor their promise to decentralize over time; and how not to deter crypto asset lending programs.

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Saylor needs a crypto telethon

Meanwhile, Peirce’s task force continues to meet with crypto operators and—for the first time—an actual crypto critic.

On February 21, the task force met with Michael Saylor, founder of Strategy, aka the rebranded MicroStrategy (NASDAQ: MSTR). It’s a good thing the meeting didn’t happen this week, as Saylor’s latest BTC buy is already deep underwater.

Strategy acquired 20,336 BTC at US$97,514 apiece last week for a total cost of $1.99 billion. When BTC briefly dipped to $86,100 on Tuesday, Saylor’s latest buy was worth $232 million less than he paid for it. Ouch.

Anyhoo, Saylor’s meeting with the SEC was largely a rehash of his previously issued Digital Assets Framework, which really ramps up the ‘crypto casino’ vibe by calling on the SEC to “enable access to thousands of digital assets.” This kinda undercuts Saylor’s previous claims that “there is no second best” option after BTC, but apparently third place and beyond is totally up for grabs.

Saylor’s framework also includes a plea to establish a “Strategic Bitcoin Reserve” that’s “capable of creating $16–81 trillion in wealth for the US Treasury.” Given the aforementioned quarter-billion-dollar wealth decline Saylor just took, perhaps this suggestion could be safely set on the backburner for the moment.

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Paradigm wants public investment, ‘sophisticated’ investors

On February 18, the task force met with representatives from Paradigm Operations LP, the crypto-focused venture capital group run by Coinbase co-founder/director Fred Ehrsam III.

The documents Paradigm submitted ahead of their meeting state a couple of ‘high’ priorities, including asking the SEC to declare that “a fungible or non-fungible crypto asset sold as the object or subject of an investment contract security is not itself a security,” as well as establishing a safe harbor for token airdrops.

Paradigm also wants the SEC to clarify that solo staking of assets in proof-of-stake (PoS) networks like Ethereum doesn’t constitute an ‘investment contract arrangement’ as defined under Howey. Similarly, staking-as-a-service providers should be treated like movie stars, and all litigation against them dropped.

Other priorities include broadening the definition of ‘accredited investor’ beyond simply being rich enough to take a financial bath. Paradigm suggests this category should also recognize investors’ “sophistication in regard to the technology in which they seek to invest.” Paradigm also want less restrictions on ‘public investment vehicles’ investing public money in digital Beanie Babies, because crypto has long since run out of retail sucker money.

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This meeting could have been an email

Cypto/stablecoin infrastructure platform Zero Hash submitted documents calling on the SEC to recognize that “Crypto can be many things—a security, commodity, payment and remittance instrument, or stored value account. Federal law should not constrain the broad set of existing applications, nor inhibit innovation as this technology continues to be adopted.”

In practice, this lofty language involves clarifying when tokens are securities; allowing “state-charted trusts” (we’re pretty sure they mean ‘state-chartered’) to act as qualified custodians under federal securities laws; and ensuring that crypto operators have ‘fair access’ to banking services, including “a path to membership in the Federal Reserve System.”

On February 19, it was Robinhood’s turn at the table. The agenda focused on custody, staking, trading, lending, and token listing criteria—including for memecoins, which really aren’t having the best month—plus tokenization of real-world assets.

On February 20, documents submitted by crypto custodians Fireblocks focused on the fact that banking and capital markets standards “have not kept pace” with the rise of “new forms of digital asset custody (and their corresponding controls).” Fireblocks wants the SEC to focus on “cybersecurity; privileges and access management; detection, response, and investigation management; business continuity, disaster recovery, and resolvability; and key management.”

On February 21, the Crypto Council for Innovation made a case for the SEC to (among other things) exempt staking-as-a-service from securities laws; declare that NFTs aren’t securities; declare that non-custodial Web3 marketplaces are neither brokers nor exchanges; and “redefine decentralization to focus solely on control and not the ongoing efforts of developers/entrepreneurs.”

On February 24, the law firm of Cahill Gordon & Reindel threw its hat into the ‘make ICO’s great again’ ring, seeking clarity on how companies could sell tokens that constitute “a functional part of an independent blockchain-based network or application developed by, or at the direction of, the company.”

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The nays have it

On the less impressed side of the crypto table, the aforementioned Better Markets sent its director of securities policy Ben Schiffrin to meet with the task force on February 25. However, the sole documentation uploaded by the SEC to date was Better Markets, emphasizing “the need to prevent fraud in the crypto space.”

A surprise submission came from the MITRE Corporation, a non-profit group that began as a military think tank but currently operates federally funded research and development centers. These centers support government agencies involved in national defense, aviation safety and “cybersecurity challenges that pose a serious risk to national security, public safety and economic prosperity.”

MITRE is a key member of IVAN, the federal government’s Illicit Virtual Asset Notification public-private information sharing partnership tasked with improving “timelines of detection and disruption of ransomware and other illicit virtual currency payment flows.” MITRE also boasts experience with cyber threat frameworks focused on digital assets.

Among the crypto concerns noted by MITRE are hidden centralization in decentralized financial markets; bank stress testing for coupled DeFi-TradFi scenarios; and the need for circuit-breakers at a smart contract level to mitigate risk-propagation.

Tokenization/custodial/trading platform Chia Network—which relies on a proof-of-space-time consensus mechanism—struck a somewhat vengeful note in their documentation with the suggestion that, while all crypto projects “should have a pathway to become compliant … the proper retroactive relief should not discourage and disincentivize actors who bore the cost to be compliant all along.”

Chia noted the “inordinate amounts of time and resources” that it put into properly engaging with the SEC on its projects, as well as the fact that Chia “never marketed our tokens as a speculative investment and did not ‘dump on retail’ at our token market high.”

As such, Chia doesn’t want those who took shortcuts to get off lightly. “Remediation costs should be significant enough to discourage further wrongdoing or consider how compliant actors have been disadvantaged.” And if that doesn’t work, rack ‘em.

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