In a significant development within the cryptocurrency industry, Crypto.com has initiated legal proceedings against the U.S. Securities and Exchange Commission (SEC) following the receipt of a Wells Notice. This move underscores the ongoing tension between crypto entities and regulatory bodies, as the industry seeks clarity and fair treatment under the law.
A Wells Notice is a formal communication issued by the SEC indicating that the agency is considering enforcement action. In response, Crypto.com has filed a lawsuit alleging that the SEC has overstepped its regulatory authority. The crux of the dispute lies in the classification of certain digital assets and the SEC’s jurisdiction over secondary-market sales of these assets.
The Wells Notice, received by Crypto.com on August 22, 2024, suggests that the SEC is contemplating charges related to the operation of an unregistered broker-dealer and securities clearing agency, as it regards certain network tokens traded on the platform as securities, excluding Bitcoin (BTC) and Ethereum’s ether (ETH). In response, Crypto.com’s lawsuit seeks declaratory and injunctive relief to prevent what it views as an unlawful expansion of the SEC’s jurisdiction over secondary-market sales of these tokens.
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Crypto.com’s CEO, Kris Marszalek, has positioned the lawsuit as a defense against the SEC’s “unauthorized overreach and unlawful rulemaking,” aiming to protect the future of cryptocurrency in the United States. The case highlights the broader industry’s struggle with the SEC’s approach to regulation, which some view as a “regulation by enforcement” regime that has affected millions of American crypto holders.
Crypto.com’s legal action is a bold step in challenging what it perceives as the SEC’s “unauthorized overreach and unlawful rulemaking” which, according to the company, threatens the future of cryptocurrency in the United States. The lawsuit seeks declaratory and injunctive relief to prevent the SEC from expanding its jurisdiction to cover secondary-market sales of network tokens sold on Crypto.com’s platform.
The case filed by Crypto.com argues that network tokens, which are digital assets used to access or interact with a public blockchain network, are not securities under the Securities Act of 1933 or the Securities Exchange Act of 1934. The company contends that the SEC has conceded this fact in multiple administrative and federal court cases involving Crypto.com’s competitors.
However, despite these concessions, Crypto.com asserts that the SEC has been aggressively pursuing enforcement actions based on a de facto rule that nearly all network tokens are a newly defined financial instrument called a “Crypto Asset Security.” This term, according to the lawsuit, has no foundation in the Securities Act or Exchange Act and represents an unlawful expansion of the SEC’s regulatory scope.
The lawsuit also highlights the inconsistency of the SEC’s approach, noting that while the agency has exempted bitcoin and ether from being classified as securities, it has not extended the same treatment to other network tokens with substantial similarities.
Crypto.com’s legal challenge is part of a broader industry pushback against the SEC’s regulatory approach, which many in the crypto space view as “regulation by enforcement.” The outcome of this lawsuit could have far-reaching implications for the cryptocurrency industry, potentially setting a precedent for how digital assets are regulated in the United States.
As the legal proceedings unfold, the cryptocurrency community will be watching closely. The resolution of this case could either pave the way for a more innovation-friendly regulatory environment or reinforce the current state of uncertainty that hampers the growth and mainstream adoption of cryptocurrencies.