Crypto.com Sues SEC Over Alleged Overreach in U.S. Digital Assets Regulation

The lawsuit targets the U.S. Securities and Exchange Commission (SEC), its Chair, Gary Gensler, and four other commissioners. This legal action comes in response to the SEC issuing Crypto.com a Wells Notice, a formal warning suggesting that enforcement action may soon follow.

Kris Marszalek, CEO of Crypto.com, explained in a post on X (formerly Twitter) that the lawsuit was filed to “protect the future of crypto in the U.S.” He emphasized that the company’s legal response was a necessary step against the SEC’s “regulation by enforcement” strategy, which he claimed has negatively impacted over 50 million American crypto holders.

The Wells Notice was issued to Crypto.com on August 22, according to the court filing. These notices typically outline potential charges the SEC may bring and often lead to enforcement actions. Crypto.com is not the only crypto entity to receive such a notice; other companies, including Binance, Ripple, Coinbase, and OpenSea, are also pushing back against the SEC’s regulatory tactics. 

OpenSea received a Wells Notice in August concerning non-fungible tokens (NFTs) on its platform, which the SEC alleged were securities. OpenSea’s CEO, Devin Finzer, expressed surprise but remained determined to challenge the notice. Earlier this year, decentralized exchange Uniswap also received a similar notice, which it urged the SEC to withdraw.

In its lawsuit, Crypto.com is seeking “declaratory and injunctive relief” to prevent the SEC from extending its jurisdiction to cover secondary-market sales of certain network tokens traded on its platform. Foris DAX Inc., the legal entity behind Crypto.com, filed the suit.

“We are doing so [suing the SEC] to protect the future of the crypto industry in the U.S., joining a series of our peers who are actively defending themselves and taking action against a misguided federal agency acting beyond its authorization under the law,” Crypto.com claimed in its statement.

The SEC’s notice classified most network tokens, excluding Bitcoin (BTC) and Ethereum (ETH), as securities. Consequently, the regulator has accused Crypto.com of operating as an unregistered broker-dealer and securities clearing agency in violation of federal securities laws.

In a separate filing, Crypto.com also submitted a petition requesting a joint interpretation from the SEC and the Commodity Futures Trading Commission (CFTC). This petition seeks to confirm that certain cryptocurrency derivative products fall solely under the jurisdiction of the CFTC.

According to the filing from Crypto.com, the company has been under investigation by the SEC for over two years. This scrutiny became formal on March 28, 2023, when the SEC officially launched its investigation into the exchange.

Crypto.com’s lawsuit against the SEC centers on the regulator’s broad classification of digital assets. The company argues that the SEC is treating “every network token in existence” as a security, with the exception of Bitcoin and Ether, despite these assets sharing “substantial similarities” with other tokens.

In its court filing, Crypto.com points out that the SEC has not clarified which tokens traded on its platform it considers to be securities. As a result, the company is asking the court to rule that none of its tokens are securities. It also seeks confirmation that it is not operating as an unregistered securities broker-dealer or securities clearing agency.

The crypto industry as a whole has long called for the U.S. to establish clear, tailored regulations for the sector. The lack of clarity has left companies uncertain about how to operate within the law. In May, the House of Representatives passed a comprehensive crypto bill, the Financial Innovation and Technology for the 21st Century Act (FIT21), though the Senate has not yet reviewed it.

Following the news of the lawsuit and a post from Crypto.com CEO Kris Marszalek on X (formerly Twitter), the company’s native token, Cronos (CRO), dropped as much as 4.7%. At last check, it was trading 2.4% lower.

Despite the lack of clear regulations, or perhaps because of this, crypto crime is rife. To combat this, the FBI undertook an undercover operation, codenamed “Operation Token Mirrors,” that has culminated in U.S. prosecutors charging 18 individuals and entities, including four major crypto firms—Gotbit, ZM Quant, CLS Global, and MyTrade—for alleged market manipulation and fraudulent trading practices.

These firms are accused of engaging in widespread fraud, including “wash trading” schemes that misled investors and artificially inflated the value of over 60 cryptocurrencies.

The FBI, known for its innovative tactics in combating crime, took the unprecedented step of establishing the fake NexFundAI on the Ethereum blockchain. The bureau created a website for the token, designed to appear like any other cryptocurrency project, complete with detailed descriptions of the token’s purpose and potential. However, this token was actually a trap to attract crypto firms that specialized in inflating trading volumes and prices for profit.

Source: FBI