Regulation
Cryptocurrency Firms Take SEC Fight to Texas, With an Eye on Supreme Court
The cryptocurrency industry, cornered by securities regulators in New York, is going on the offensive in Texas, with the support of venture capital giants and veterans of the U.S. Supreme Court.
At least twice in recent weeks, small cryptocurrency firms wary of enforcement have teamed up with well-connected trade groups to sue the Securities and Exchange Commission, challenging how the agency polices their industry.
The lawsuits, filed in a circuit known for challenging the agency’s powers and led by the likes of former U.S. Attorney General Paul Clement, represent an evolution of the cryptocurrency industry’s legal strategy in response to the SEC’s crackdown.
To legal observers, the strategy seems clear: create division among the district courts and attract the attention of the nation’s highest court.
“This is absolutely them going on the offensive,” said Todd Phillips, a law professor at Georgia State University’s Robinson College of Business who has filed briefs supporting some of the SEC’s arguments in cryptocurrency cases. “This is absolutely them preparing a case for the Supreme Court.”
One of the industry groups, the Crypto Freedom Alliance of Texas, launched in September with deep-pocketed backers. Founding members include Andreessen Horowitz’s a16z crypto, Coinbase Global Inc., and Bain Capital Crypto.
Cryptocurrency crackdown
The SEC has aggressively targeted the cryptocurrency industry in recent years. The agency’s chairman, Gary Gensler, considers most digital assets to be securities subject to SEC rules.
By the end of 2023, the agency had initiated more than 170 cryptocurrency-related enforcement actions, collecting nearly $2.9 billion in fines and other penalties, according to Cornerstone research. relationshipNearly three-quarters of these cases were filed in the last four years.
The SEC’s actions include high-profile lawsuits against Coinbase and Binance Holdings Ltd., accusing them of illegally operating unregistered exchanges. The agency has also sued companies such as Ripple Labs Inc. for allegedly selling unregistered securities.
More than a third of the SEC’s lawsuits have been filed in the Southern District of New York, the most of any court, according to a report from Cornerstone Research. The agency has had some victories in those cases, including last week when a judge refused to dismiss its lawsuit against Coinbase.
To know more: SEC’s Coinbase Lawsuit Can Go Forward, Judge Rules
By filing lawsuits in Texas, where the SEC has typically not pursued cryptocurrency lawsuits, the industry appears to be trying to flip the script.
“Up until now, the SEC has been driving the development of case law to a certain extent, being strategic about which cases to pursue, on which fact patterns, in which jurisdictions,” said Kayvan Sadeghi, who leads the blockchain practice at Jenner & Block LLP. “These challenges are trying to take back some of that initiative.”
Rather than wait for the regulator’s next move, cryptocurrency plaintiffs are “trying to get legislation passed that is pro-industry,” said Joshua Ashley Klayman, head of the fintech practice at Linklaters LLP and head of the firm’s blockchain and digital assets practice in the U.S.
“In many ways, this is a bit like playing chess in 3D,” Klayman said.
‘Easy Panatroccoli’
The cryptocurrency industry fired its first salvo at the Lone Star State on February 21 suit by CFAT, the recently formed industry trade group, and Lejilex, which plans to launch a cryptocurrency exchange. The plaintiffs supported that secondary sales of digital assets are not securities, which places them outside the SEC’s authority.
“We expect more strategic lawsuits like this to be filed soon,” Jake Chervinsky, chief legal officer at crypto venture capital firm Variant, wrote on LinkedIn after the lawsuit was filed in the Northern District of Texas.
The second one suit It happened last month, when the DeFi industry group Education Fund joined Beba LLC in a case against the SEC. Beba makes suitcases and launched digital tokens as part of a marketing strategy. It wants a ruling that the airdrops were not securities transactions.
DEF and Beba, who filed their lawsuit in the Western District of Texas, are also challenging the SEC’s “unwritten policy” on cryptocurrency regulation as violating the Administrative Procedure Act, arguing that the agency should have adopted formal rulemaking.
“We are tired of being easy targets,” Amanda Tuminelli, DEF’s legal director, said by telephone.
Chervinsky, Variant’s chief legal officer, also sits on the DEF steering committee.
There are other recent attempts to take the fight to the SEC. Coinbase sued the Philadelphia-based Third Circuit agency late last year, after the SEC rejected the exchange’s request to issue new rules on digital asset trading.
But lawsuits filed by the industry in Texas, before the SEC took any action, highlight a new approach.
The ideal, Tuminelli said, would be to find legislative solutions to cryptocurrency rules. “In the meantime, we think we need to go to court, and this is the clearest and most efficient way to get a court order,” he said.
Watch Out for the Supreme Court
In both Texas cases, the sides appear to be preparing for a long-term game.
The legal team of CFAT and Lejilex includes Clement, a former Attorney General, known for having followed high-profile cases at the Court of Appeal and the Supreme Court.
DEF and Beba are represented by former Clarence law clerk Thomas Cameron Norris, an attorney at Consovoy McCarthy PLLC. The firm has racked up recent Supreme Court victories, including over racist college admissions programs.
The groups have turned to the lower courts of the Fifth Circuit, a place considered pro-business and skeptical of the powers of administrative agencies. As for the SEC, the appeals court recently struck down a rule regarding share buybacks and rejected the use of in-house judges. Some Fifth Circuit judges have also questioned the agency’s use of “gag orders” in settlements.
Tuminelli said DEF and Beba’s relationship formed organically after he met one of the company’s founders at a cryptocurrency conference. The fact that the small retailer is based in Waco made it “an easy decision” about where to file the lawsuit, he said.
For court observers, the potential implications are clear.
New York lower courts sided with the SEC on several key issues, including: refusing arguments that regulating cryptocurrencies implicates the Supreme Court’s core questions doctrine, which requires agencies to have clear authorization from Congress for an action with significant economic or political consequences.
In the Coinbase case, a federal judge in Manhattan on March 27 She said Cryptocurrency transactions are not categorically excluded from the category of securities just because they occurred on a secondary market.
“Although Second Circuit courts have not seemed receptive to the core issues doctrine in encryption cases, Fifth Circuit courts may take a different perspective and view the doctrine with greater interest,” said Helen Gugel, a litigation and enforcement partner at Ropes & Gray LLP.
Likewise, Phillips said it wouldn’t be surprising if the Fifth Circuit came to a different conclusion about the applicability of securities laws to publicly traded cryptocurrencies, creating the potential for a split among the appellate courts. He called it an “ingenious” move by the industry.
If the appellate courts go in different directions on these issues, the Supreme Court “essentially has to take up the case because you can’t have some tokens be securities in some parts of the country and some not in other parts of the country,” Phillips said.