Ex-SEC Lawyers Agree: Crypto Enforcement Shackles May Take Time to Resolve

As a seasoned observer of the ever-evolving landscape of financial regulation, I find myself intrigued by the impending changes at the Securities and Exchange Commission (SEC). With my years of experience in the field, I’ve seen my fair share of regulatory shifts, but this one seems particularly noteworthy.

Following numerous court battles with the U.S. securities regulator, the crypto industry perceived Donald Trump’s election victory as an indication that ongoing legal disputes and regulatory pressure would likely diminish once he is sworn into office again.

However, discarding the regulatory imprint of Securities and Exchange Commission Chair Gary Gensler isn’t as straightforward, as suggested by some former agency officials and legal professionals who now work with cryptocurrency clients, according to their interviews with CoinDesk.

A newly appointed chairman for the SEC who has recently become interested in cryptocurrency, nominated by Trump, may streamline future enforcement actions. However, resolving ongoing cases could prove challenging and might require several months, possibly extending into 2025 or beyond. Legal experts suggest that significant case dismissals may not occur even after the transition.

Among the notable federal cases, one that stands out is the SEC’s legal tussle with Ripple Labs. This case marks the initial significant disagreement where the agency accused the company of functioning as an unregistered securities exchange. During that time, Jay Clayton served as the chairman, not the current controversial figure Gensler. The president who appointed him was Donald Trump.

In essence, Ladan Stewart, a partner at White & Case and former top enforcement attorney at the SEC, pointed out that the Securities and Exchange Commission’s (SEC) current strategy towards cryptocurrency has roots tracing back to the previous administration.

In Stewart’s words, “There’s been much criticism against Gensler regarding the Ripple case in the media, but it’s important to note that this case was initiated toward the end of the Clayton SEC tenure. Essentially, the SEC’s stance on crypto under Gensler is merely an extension of how things were handled during the Clayton era.

The agency faces fresh queries regarding the issue: Should the legal benchmark called the Howey test accurately classify cryptocurrency tokens as securities or not? Does labeling these securities persist when they are traded on secondary platforms like Coinbase Inc.? Is there a possibility that the SEC may revert to using the Howey test to regulate unacceptable practices in the crypto market, which could otherwise evade their control if they don’t attach the “securities” label to the concerned assets?

Since Clayton, the regulatory agency has considered the fundamental structure of cryptocurrency platforms as a breach of securities law. Many tokens have been identified as securities, and if an exchange isn’t registered, it is illegal to trade them. This key issue is central to the Ripple case and the action taken against Coinbase (COIN). Unlike the SEC’s typical Wall Street cases which don’t often pose life-or-death threats to companies, this core question determines whether major cryptocurrency exchanges can continue operating in the U.S. or not.

Are crypto tokens securities?

Upon my arrival in 2021, I found that the Securities and Exchange Commission, led by Chairman Jay Clayton, had already taken approximately 80 enforcement actions, one of which was against parties involved in the cryptocurrency markets who failed to adhere to basic road rules. In a speech delivered on Thursday to the Practising Law Institute, I emphasized that under my leadership, this vigilance would continue.

The organization, failing to provide comment regarding its present approach in legal matters, leans heavily on a landmark U.S. Supreme Court case called Howey, which outlines the criteria for determining if an asset is classified as a security. To date, this entity has shown a varied history of decisions involving cryptocurrencies in the primary federal courts.

According to Patrick Daugherty, a legal expert who represents cryptocurrency clients at Foley & Lardner in Chicago, all the cases brought forward make “extremely assertive accusations of law violation.” He suggests that the agency should scrutinize each case individually, as each one needs to be evaluated based on its unique merits.

In the absence of any alterations, these crypto cases might have been handed over to the Supreme Court. However, the reemergence of Trump as a self-proclaimed “crypto president” could lead to a change in leadership at the relevant agency, potentially resulting in a stance that appears more sympathetic towards the major crypto cases.

In the worst-case scenario, he stated that they might choose to discard the cases. However, ending them abruptly could be challenging and may not always be necessary.

An alternative might involve structured agreements where cryptocurrency companies acknowledge no fault but consent to abide by any rules or restrictions established by the regulating agency.

“Those things take a little bit of time to put together and do correctly,” Daugherty said.

Paul Grewal, Coinbase’s chief legal officer and leader of their battle with the SEC, opines that it would be unreasonable to anticipate a substantial change happening right away. However, he expressed confidence in Trump’s team to act promptly, despite the somewhat chaotic course of action during his previous term in office. Contrary to some opinions suggesting an endless process, Grewal politely asserts that it won’t take forever.

Grewal’s first choice is complete dismissal, but he suggested he’s open to discussion.

Need a commission majority

Regarding all ongoing crypto cases, Anne Kelley, a former SEC official and current member at Mercury Strategies, indicated that the SEC has the option to either stop pursuing legal action or negotiate settlements, potentially even in a cost-effective manner. However, she emphasized that such a decision isn’t made individually by the chairman; instead, it requires a vote among the commission members.

For significant decisions such as terminations, agreements, and disciplinary actions, it’s crucial to recognize that they can’t be managed solely by a newly appointed chairperson and their immediate legal team.

At the level of federal appellate courts, for example, the agency’s general counsel is in charge of overseeing relevant matters, as stated by Tom Krysa, another ex-SEC enforcement attorney who works at Foley & Lardner in Denver. This office might be capable of requesting a stay (which is a formal pause) under the vigilant eye of the chair’s office. However, it requires the commission’s approval from the majority to completely withdraw an appeal altogether.

As a crypto investor, if Trump indeed appoints Republican SEC Commissioner Mark Uyeda as acting chairman in January, it’s important to note that he would only have another Republican on the commission for some time. Even if Gensler decides to step down from his role after the chairmanship, instead of serving out his term as a commissioner which ends in June 2026, there are still two other Democratic members who can potentially block any pro-crypto changes.

Commissioner Caroline Crenshaw’s tenure ended in June, but she is eligible to serve until the end of 2025, or until a new candidate successfully completes the Senate’s lengthy confirmation process, which can take several months.

In the shorter run, the agency could modify its approach towards unopened cases or ongoing investigations that have not reached a decision yet.

In my perspective as an analyst, I anticipate that we won’t encounter the type of registration-only issues that have been problematic for many notable cryptocurrency companies in the near future.

Coinbase’s Grewal stated he anticipates the new SEC will promptly distinguish between cases involving fraud or deception, and those that are technically complex but have caused no consumer harm at all, like the registration complaint filed against their company.

Commission Uyeda has expressed support for pausing further actions against cryptocurrency companies who have violated registration rules, as they work on clarifying the process instead.

According to reports, Uyeda emphasized the importance of establishing precise instructions and explanations about which activities are covered by securities regulations, and which ones aren’t.

In a recent live discussion, John Reed Stark, who previously led the SEC’s Office of Internet Enforcement, expressed his viewpoint. He suggested that the influence of the cryptocurrency industry has been recognized, and under the upcoming SEC leadership, it may receive a favorable response. Stark further stated that the selection of the new enforcement director would be crucial, as they will review all ongoing crypto-related investigations and litigations. The focus is expected to be on cases involving severe fraud, with resources being directed towards these instances. Cases that do not involve such malicious activities may potentially be discontinued, indicating a possible change in the nature of cryptocurrency enforcement.

As an analyst, I cannot help but emphasize the significance of this transition we are about to undergo. A substantial amount of financial resources are involved in these instances, making it a critical juncture indeed. Beyond the fiscal implications, however, the future of our industry hangs precariously in the balance within the United States.