Tag: SEC Chairman

The SEC Came to Destroy Crypto, Not to Regulate It

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By Roslyn Layton. (DC Journal). April 3, 2024.

Following the Securities and Exchange Commission’s effort to stretch, bend and twist the law to grant itself authority to regulate cryptocurrencies has been like watching an exhausting video game. By the last level, the monster has grown so grotesque and ridiculous that you’re just waiting for the relief of seeing it explode so the comforting words “game over” can finally appear.

Unfortunately, it’s not a game for many innovative U.S. Financial Tech companies. The SEC has mobilized all its resources to carry out a policy against crypto companies that is not designed to protect investors from fraud or even to clarify what legal compliance means. It is practicing what professor J.W. Verret of George Mason University has called “enforcement by destruction,” trying to turn courts into execution chambers for an industry it never intended to regulate but to destroy.

It comes down to a bait-and-switch strategy by two successive SEC chairmen to claim that every digital asset, no matter how it is designed, is itself a “crypto asset security,” and that gives the agency full authority to require they be registered like stocks. Nothing in nearly a century of securities law provides the SEC such all-encompassing authority over an entire asset class. But the SEC’s strategy was never to prove this theory in court so much as to have a pretext to launch enforcement actions never meant to bring anyone into compliance.

Read the full piece here: DC Journal

The SEC Is Engaging In Regulation By Destruction

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By J.W. Verret. (Law360). April 1, 2024.

The term “regulation by enforcement” was coined in 1990 by Harvey Pitt in his days as a Yale law professor, about a decade after he served as general counsel of the U.S. Securities and Exchange Commission and before he became chair of the SEC. The warning was eerily similar to President Dwight D. Eisenhower’s farewell address cautioning about the growth of the military-industrial complex.

Regulation by enforcement has become manifest in the SEC’s approach to the emerging technology of cryptocurrencies, using lawsuits instead of rulemaking to claim that all digital assets are unregistered securities and fully under the commission’s authority.

Pitt’s term doesn’t fully capture what the SEC’s strategy on crypto has evolved into: “Enforcement by destruction” is more apt.

There is a lengthening docket of SEC lawsuits over unregistered crypto-asset securities, where no fraud was alleged and there has been no evidence of harm to investors.[1] Some of the SEC’s chosen defendants don’t have the resources to properly fight the allegations, and must choose between surrender or bankruptcy — and may end up with both. And those that do, like Ripple Labs, face nearly $2 billion in fines from the SEC.

Private litigators understand spurious claims can be an effective means of drowning a defendant in legal costs even for meritless litigation. The SEC’s apparent adoption of this tactic has come to dominate its enforcement actions alleging failure to register crypto-asset securities.

It knows it may lose on the merits of its claims, as it did for most of the claims in the Ripple case, but is seemingly betting that the financial harm of prolonged litigation will far outweigh an eventual fine and the defendants will fold. The SEC gets a victorious press release, but the markets get no clarity on what compliance actually means.

The SEC could have easily provided that clarity by granting Coinbase‘s 2023 petition for a crypto rulemaking from the commission after the company received a Wells notice a year ago, but the SEC has stubbornly refused to take up the request, which is now before the U.S. Court of Appeals for the Third Circuit.[2]

The SEC’s apparent shift to destruction as a tactic was evident in its 2022 lawsuit in the U.S. District Court for the District of New Hampshire against LBRY, which built a blockchain-based content platform seeking to be a decentralized and uncensored version of YouTube. The SEC said LBRY’s distribution of the LBC token, a form of user credit on its platform, was an unregistered securities offering. The company decided to fight in court without the financial heft to mount a strong defense.

By the time LBRY later went bankrupt and shut down during the remedies phase, the SEC had reduced the fine it was seeking from $22 million to a mere $111,614. This provoked a public dissent by SEC Commissioner Hester Peirce, who questioned the proportionality and fairness of causing “the demise of a company” in a dispute over registering a token.[3]

“This case illustrates the arbitrariness and real-life consequences of the Commission’s misguided enforcement-driven approach to crypto,” Peirce said.

In my own review of settlements obtained between 2019 and today where the SEC simply alleged unregistered offerings of crypto-asset securities, the civil penalties it ultimately collected averaged 11.6% of the alleged unregistered sales. If no investors were defrauded or harmed in any of these cases, what was the point of threatening these companies with destruction if they opted to defend themselves?

Unlike LBRY, Ripple had the resources to fight the SEC’s allegation that all sales of its XRP digital token, even on public exchanges, are unregistered investment contracts in Ripple. After more than three years in court, U.S. District Judge Analisa Torres of the U.S. District Court for the Southern District of New York in July 2023 found only a narrow set of actual investment contracts with institutional investors were unregistered securities, and dismissed the rest of the SEC’s claims.

Ripple is now eight months into the remedies stage. The SEC also promises to appeal Judge Torres’ ruling despite it being narrowly tailored to facts and circumstances and not setting any precedent. Brad Garlinghouse, Ripple’s CEO, said in December 2022 that the case has cost the company over $100 million so far, having long offered to settle in exchange for the legal clarity that Judge Torres ultimately provided.[4]

But the SEC on March 27 revised its demand to now nearly $2 billion in fines for those institutional sales where all the investors made money.[5] Actual regulation or useful legal clarity won’t be a result, since even if courts determine that some sales were of securities, the courts can’t fashion a workable registration regime for crypto. Only the SEC can do that. What results instead is just more legal costs.

Regulation by enforcement has always been an opaque process that fails to clearly define the rules or what compliance entails. The SEC’s use of it against digital assets indicates it’s more interested in causing harm to crypto companies than providing guidance to the markets or protecting investors.

The consequences of this shift are far-reaching. By pursuing this strategy, the SEC risks permanent damage to its authority and credibility for little reward. It also opens the door for financially secure defendants like Ripple to make arguments to appellate courts on wider questions of law, which could ultimately boomerang on the commission.

The more the SEC engages in enforcement by destruction, the higher the likelihood that its legacy will be one of undermining the very principles it is meant to uphold.

J.W. Verret is an associate professor at the George Mason University Antonin Scalia Law School. He is a former member of the SEC’s Investor Advisory Committee.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Good list here: https://www.morrisoncohen.com/insights/the-morrison-cohen-cryptocurrency-litigation-tracker. You will see a list of them starting on page 4, most do not allege fraud but only failure to register with the SEC.

[2] https://www.sec.gov/files/rules/petitions/2022/petn4-789.pdf.

[3] https://www.sec.gov/news/statement/peirce-statement-lbry-102723.

[4] https://news.bloomberglaw.com/business-and-practice/wall-street-veteran-is-the-face-of-crypto-in-ripple-sec-fight.

[5] See last week’s news at https://finance.yahoo.com/news/sec-ripple-well-positioned-pay-044615741.html.

Judge slams SEC for ‘gross abuse of power’ in crypto case, imposes sanctions

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By Leo Schwartz. (Fortune Crypto). 3/18/24.

On Monday, a federal judge took the unprecedented step of imposing sanctions on the Securities and Exchange Commission related to a lawsuit the agency brought against the Utah-based crypto company DEBT Box in July.

The case drew widespread attention after the defendants accused the SEC of misrepresenting key facts when the agency obtained a temporary restraining order to freeze assets on the crypto platform. After U.S. District Judge Robert Shelby ordered the SEC to explain its actions, lawyers for the agency admitted the SEC had committed errors, but asked Shelby not to issue a formal punishment.

In Monday’s decision, Shelby denied the SEC’s request, citing multiple instances of “bad faith” conduct and finding the agency responsible for a “gross abuse of power.” In the 80-page filing, Shelby imposed a sanction in the form of a requirement for the agency to pay for DEBT Box’s attorneys’ fees and costs related to the restraining order. The judge also denied the SEC’s motion to dismiss the lawsuit without prejudice, which would have meant the agency could bring the lawsuit again at a later date.

“[The SEC’s conduct] substantially undermined the integrity of these proceedings and the judicial process,” Shelby wrote.

Read more here: Fortune Crypto.

Government’s Attack Vectors

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By Kristi Warner

The government’s approach to remedies and bitcoin mining are similar examples of agencies utilizing tools at their disposal to attack the crypto industry. 

Remedies

In July 2023, the SEC lost in the Ripple case on the main legal theories – Judge Torres ruled that secondary market sales were not sales of unregistered securities and XRP itself is not a security. 

Individual XRP holders got their resolution.

Now the case is really at a point where institutional sales and remedies are the focus. The SEC utilizes remedies and reliefs in many cases, and the type of remedies asked for typically varies based on the type of litigation. 

In the Ripple case, the SEC after losing on the legal theories, and vindicating the two executives still wants the company to pay a lot of money in remedies so they can hold the company “accountable”, and right any wrongdoing. 

The irony is that the people the SEC are supposed to be protecting (you and me) were not harmed by any of Ripple’s actions. Instead, it was the SEC’s action that resulted in restricted access, delistings and actual harm to us. 

That is because the SEC has weaponized its authority in an attempt to destroy innovation. Thankfully what we have been seeing in a lot of the cases are ourts keeping the SEC in check. 

The American Government was designed to be a system with checks and balances between the three branches. 

So while I agree we can look beyond the SEC v. Ripple case, I still think lawsuits in general are important to pay attention to as they are key to keeping the government agencies accountable and allow the industry to fight back. 

Bitcoin Mining

Another recent example of this is the RIOT Platforms and Texas Blockchain Council suit against the Biden Administration in a Texas court. 

The backstory is the U.S. Dept. of Energy had decided to conduct an “emergency” survey of the energy use by crypto miners based on its own unwarranted assertion that mining is a threat to the power grid. Allegedly the agency threatened companies with criminal fines and civil penalties if they did not answer the survey. The survey was requested without proper procedure established by law including public notice and comment requirements.

Once again we’re faced with a government agency trying to sidestep the law and bully crypto companies into submission by misusing tools at their disposal.

Solution

How can we combat that? 

In today’s world one solution to maintain the system of checks and balances is heading to Court. That’s what RIOT and Texas Blockchain did and while it was not the exact relief they were seeking, the lawsuit forced the government to halt their survey and destroy the sensitive and confidential information they had already acquired through the survey. 

Same with Ripple – they exposed government overreach by fighting back against the SEC in court. 

These are both huge blows to the government’s war on crypto because when these agencies are committing government overreach, the courts are putting that power in check and forcing them to follow the law. 

Watch the full livecast here: https://www.youtube.com/watch?v=eQxoBShe2CI&t=2s

Gary Gensler’s Blundering SEC Mirrors Biden’s Incompetence

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By Gerard Scimeca. (RealClear Markets). March 6, 2024.

Touting historically low approval ratings rivaling that of paper cuts and hay fever, one might think Joe Biden and his handlers cared enough about voter sentiment to address the more problematic areas of his administration serving to inflame his unpopularity. 

An obvious place to start would be to cut bait with the capricious, reckless, and rogue Chairman at the Securities and Exchange Commission (SEC), Gary Gensler. That Biden has yet to remove the haughty Gensler is an affirmation of all that is wrong with his presidency and the SEC itself, whose continued bungling has drawn the ire of millions of American investors. 

After 10 years of denials, last month the SEC approved a number of spot Bitcoin exchange-traded funds (ETFs), even as Gensler himself continued to denounce them. While the occasion represents a watershed moment for digital assets in the U.S., the approval was given grudgingly by a Commission boxed into a legal corner.

Read more here: RealClear Markets

To Restore the SEC’s Credibility, Appoint a New Chair

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By Rep. Todd Tiahrt. (RealClear Policy). February 21, 2024.

Economic uncertainty is one of the top issues facing the country today. Many Americans have been forced to rethink their spending habits while concerns about job stability and fluctuating market conditions are leading families to focus more on savings and debt reduction as they prepare for potential financial challenges ahead.  

To guide the United States through this tumultuous period, it is crucial to have trustworthy and reliable regulators who can stabilize markets during a crisis and who will collaborate with American businesses throughout such instability. That is why it is difficult to comprehend why Gary Gensler remains President Joe Biden’s chair of the Securities and Exchange Commission (SEC). It is even a puzzle why President Biden selected him in the first place.

After a scandal-tinged tenure as President Barack Obama’s chairman of the Commodity Futures Trading Commission (CFTC), Gensler has led a series of gaffe-prone crusades against American companies as SEC Chairman with embarrassing results. A recent study found that most of the flurry of proposed and finalized rules under Gensler was not tied to any authority granted to the SEC by Congress. He has mostly freelanced, letting politics and press releases guide his actions rather than the letter of the law.

Read more here: RealClear Policy

Is Cryptocurrency Like Stocks and Bonds? Courts Move Closer to an Answer.

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By Matthew Goldstein and David Yaffe-Bellany. (The New York Times). January 26, 2024.

For more than a decade, the pioneers of the cryptocurrency industry envisioned digital coins as an alternate branch of finance, a renegade sector that would operate outside the reach of big banks and government regulators.

But as digital currencies like Bitcoin and Ether became more mainstream, the crypto industry collided with a 1946 Supreme Court decision that created what is known as the Howey Test, a legal analysis that determines when a financial product becomes subject to the same strict rules as stocks and bonds.

In recent years, regulators have seized on that legal precedent to argue that cryptocurrencies are just another security, like shares of Apple or General Motors. The crypto industry has fought back, leaving it in a legal gray zone with an uncertain future in the United States.

Now the long-running dispute is edging closer to a resolution, as federal judges begin weighing in on a series of lawsuits by the nation’s top securities regulator against some of the largest crypto firms. This month, judges held hearings in two of the most consequential cases, which could dictate whether the multitrillion-dollar crypto industry can continue growing in the United States.

Read more here: The New York Times.

A Sound Template for Crypto Regulation

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By J.W. Verret. (DC Journal). December 11, 2023.

The last few months have seen a seismic shift in the crypto industry, putting the Securities and Exchange Commission squarely in the hot seat. The agency seems to have taken the wrong regulatory approach at every possible juncture: cozying up to fraudster Sam Bankman-Fried while excoriating crypto innovators and companies that seek to do business lawfully in the United States.

We’ve seen in the cases of SEC v. LBRY, SEC v. Ripple, Grayscale v. SEC and others that the commission’s overriding desire to protect entrenched political interests instead of consumers facilitated the demise of well-intentioned companies, the loss of hundreds of millions of dollars in consumers’ wealth and massive fraud going unchecked, like at FTX.

The courts have attempted to right the ship, pushing back on the SEC’s “arbitrary and capricious” rejection of its Bitcoin ETF and issuing a legally sound victory for Ripple on core legal questions in the SEC’s lawsuit against the payments company. In fact, the Ripple decision from Judge Analisa Torres of the Southern District of New York could be considered a roadmap for other crypto companies because she carefully laid out how and why the facts and circumstances of cryptocurrency offers and sales matter under existing securities law.

At its heart, this “Ripple roadmap” recognizes the nuances of how unique digital assets and their trading can be while still applying existing securities law dating back to the 1946 U.S. v. Howey decision, where the Supreme Court defined what makes a security.

Read the full piece here: D.C. Journal

Brad Garlinghouse Is 2023’s Comeback King With XRP’s Win Over SEC

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By Jeff Wilser. (CoinDesk) December 5, 2023.

On a rainy Friday night in September, a crowd of thousands filed into Hammerstein Ballroom, the legendary New York concert venue. It’s a place that has hosted the Grateful Dead, Jane’s Addiction and everyone from David Bowie to Taylor Swift.

But the crowd wasn’t here for Taylor Swift. They were here for something far more important. They came for “The Proper Party.” The party’s raison d’être? Months earlier, the CEO of Ripple, Brad Garlinghouse, had promised that if they emerged victorious from the SEC’s lawsuit, he would throw a “proper party” to honor and thank the XRP community.

Again, the crowd roared. Garlinghouse pointed to a tall, bald, muscular, goateed lawyer, John Deaton, who in many ways embodies the heart and soul and brains of the XRP Army.

Deaton raised a fist in solidarity. Pumped the fist. The crowd cheered like he’s a rock star, and to them he is. It was Deaton (with the help of XRP champions like Brad Kimes and “Digital Asset Investor“) who rallied the XRP community to petition the judge that, actually, they were buying XRP (not Ripple) and had never even heard of Ripple, thus (they argue) weakening the SEC’s argument. We’ll never know to what extent this factored in Judge Torres’ decision, but it’s possible that the XRP community saved the day.

So you could make the case that this 2023 Most Influential award should be given not just to Garlinghouse, but also the entire XRP Army.

Read the full article here: CoinDesk

Judge scolds SEC for apparent deception in crypto case, threatens to sanction agency

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By Leo Schwartz and Jeff John Roberts. (Fortune). December 1, 2023.

A federal judge has rebuked the Securities and Exchange Commission over its treatment of a crypto firm, expressing concern the agency had made “materially false and misleading representations” in order to freeze millions of dollars in assets belonging to the project.

The case, filed in Utah federal court, concerns a firm called Digital Licensing Inc., or DEBT Box. In its complaint, filed this summer, the SEC alleged the project had defrauded investors out of nearly $50 million by selling unregistered securities called “node licenses.”

As part of the initial process, the SEC successfully obtained a temporary restraining order and asset seizure through a so-called ex parte application—meaning the crypto firm was not informed of the proceedings and was not able to challenge them in court at the time.

These types of one-sided proceedings are uncommon and typically take place when a government agency fears that notifying the defendant will result in their destroying evidence or whisking assets overseas. Meanwhile, a temporary restraining order requires a party to show a high likelihood of “irreparable harm”—a high bar to clear.

Read the full article here: Fortune