Crypto.com v. SEC Is a Bold, ‘Bet the Company’ Case

In simple terms, if you’re similar to me, you might not view this as significant news because lawsuits between cryptocurrency projects and the SEC are quite common. None of these instances have resulted in major changes. However, Kris Marszalek, CEO of Crypto.com, stated that they filed the complaint to “defend the future of crypto.” Frankly, such lofty language made me believe this case was more about making a statement than taking substantial action.

As I delved deeper, however, Crypto.com seemed to take on a new form. In my previous legal career, I was involved in high-stakes lawsuits often referred to as “bet the company” cases. The actions taken by Crypto.com in Texas last week could potentially be similar.

Aaron Brogan is a managing attorney at Brogan Law PLLC.

According to Crypto.com’s statement, they received a warning letter (Wells notice) from the SEC on August 22. A Wells notice is essentially a preliminary notification that the SEC may be planning to take legal action against you. Following this, you provide evidence showing your compliance with regulations and plead with the regulatory body not to proceed with the case. However, it’s highly probable that you will soon receive a court summons.

It appears that the SEC has alleged Crypto.com for operating without proper registration as both a broker-dealer and a securities clearing agency, due to its role in facilitating trades involving cryptocurrency tokens. This accusation arises from the SEC’s view that these tokens fall under the category of “crypto asset securities,” which they claim to have regulatory control over.

Crypto.com might have chosen to wait, but they opted to take decisive steps instead. This method of handling the situation implies that the company views this matter as critical or essential to its survival.

Initially, the company brought on board Noel Francisco, a previous U.S. Solicitor General, as its legal representative. Notably, Francisco and Don Verrilli, counsel for Uniswap, have both represented the U.S. government in the Supreme Court. These individuals are highly skilled and experienced appellate litigators, which means they’re not just for show; they’re for battle. In other words, you don’t bring on Noel Francisco for a friendly chat. You bring him on board when you’re ready to fight.

At roughly the same period, Crypto.com shifted its U.S. main office from Florida to Tyler, Texas. It’s important to note that this move might have been completely unrelated to the legal disputes. However, it occurred just five days prior, placing Crypto.com under the jurisdiction of the United States District Court for the Eastern District of Texas (E.D.Tex). Notably, E.D.Tex., recognized for its patent litigation “forum shopping,” is known as one of the most conservative courts in the nation, particularly when dealing with federal agency powers.

Even more important than the district court is the appellate circuit it sits in. The Fifth Circuit Court of Appeals is the single most influential court for anti-agency jurisprudence in the country. One recent case out of the circuit, Jarkesy v. SEC, significantly limited the SEC’s authority, and, when affirmed by the Supreme Court, changed the country’s judicial landscape. There are many reasons you might want to move your company to Texas, but if you’re in a fight to the death with the SEC, the Fifth Circuit is where you want to have it.

In simpler terms, Crypto.com’s case is somewhat complex due to its reliance on a legal tactic known as a “declaratory judgment.” This type of court action allows courts to clarify rights, duties, or legal statuses before a dispute arises. However, these cases can be tricky because the law requires that disputes should ideally be resolved after they occur, not before. The related concepts of “justiciability” and “ripeness” prevent courts from getting involved in theoretical disputes. Unfortunately, ConsenSys recently lost such a case in Texas for this reason, and there’s a chance the same could happen with Crypto.com if the court decides to follow these legal principles.

If the Wells notice doesn’t prompt action from Crypto.com, it could set in motion a legal challenge that potentially dismantles SEC chairman Gensler’s regulatory framework for the crypto industry. This challenge targets the foundation upon which the SEC’s regulation is based, specifically the classification of cryptocurrency as “crypto asset securities.” Crypto.com contends that this categorization is arbitrary and lacks coherence, making it an unreliable basis for enforcement consistent with the Administrative Procedure Act (APA). The company refers to precedents set in New York and D.C. district courts, which suggest a distinction between cryptocurrencies themselves and offers to sell them, and argue that secondary market sales of cryptocurrency are not investment contracts.

In essence, Crypto.com has almost reached a crucial turning point. If they successfully tackle the initial “maturity” issue and are granted the opportunity to present their case, there won’t be much left to hinder them. Their arguments hold significant weight, and few courts, particularly E.D.Tex, are as receptive to such arguments as others. After passing through the Fifth Circuit, a court that the SEC dreads the most, it could potentially advance to the Supreme Court. Here, they would have a favorable panel and one of the country’s top appellate lawyers to argue their case.

This situation remains uncertain, but keep your eyes on it. If it succeeds, Crypto.com might revolutionize the game.

Please be aware that the opinions stated within this article belong solely to the writer and may not align with those held by CoinDesk, Inc., its proprietors, or associated entities.