A consortium of cryptocurrency industry giants is suing the U.S. Securities and Exchange Commission (SEC) in Texas over years of “erroneous SEC enforcement actions.”
The Texas lawsuit, led by the Crypto Freedom Alliance of Texas (CFAT) and Fort Worth, Texas-based start-up cryptocurrency exchange Lejilex, questions whether the SEC has regulatory authority over most digital asset transactions in the state. We are seeking judicial clarification as to whether this is the case. Plaintiffs argue that the SEC has no such authority, despite the SEC's frequent assertions to the contrary.
“The SEC's unlawful and unpredictable approach has created an environment in which companies like Lejilex cannot operate without fear of being subject to SEC enforcement action,” CFAT said in a press release Wednesday. said.
CFAT is comprised of several leaders in the cryptocurrency industry, including Coinbase, Andreessen Horowitz's a16z crypto division, Ledger, Paradigm, and Blockchain Capital. Coinbase is already in litigation with the SEC for failing to register as a stock exchange despite allegedly listing multiple securities on its platform.
The Texas CFAT case addresses the same theme, but instead engages in a preemptive state-level legal battle against the SEC.
“For the first time, we have learned that participants in the cryptocurrency industry are actively seeking a declaration that secondary market sales are not securities transactions and that digital asset trading platforms do not need to register with the SEC.” Amanda Tuminelli said. Message from DeFi Education Fund’s legal representative Decryption.
“This is similar to the principle that Coinbase is asserting in federal court in New York, but Lejilex is a centrally managed, non-custodial exchange,” she added.
CFAT's argument mirrors Coinbase's argument that the SEC's interpretation of “investment contracts” under the Howie test is too broad, resulting in securities sales from transactions that are clearly not of that type. It is claimed that
CFAT uses the example of purchasing Nike's limited edition running shoes to illustrate its position. In this case, someone purchases with the intention of reselling it later at a higher price, expecting continued marketing efforts from Nike.
CFAT notes that, under SEC rules, sneakers are technically “securities,” their resale is a “securities transaction,” and auction houses that resell shoes may be classified as “unregistered securities exchanges.” He said there is.
“We should have started a business instead of filing a lawsuit, but here we are,” Lejilex co-founder Mike Wawszczak said in a statement. “Fear of unfair enforcement should not be something entrepreneurs are forced to experience.”
The SEC has faced widespread criticism from Congress and internally for its handling of the cryptocurrency industry.
But last year, the authorities' cases against crypto companies Ripple and Grayscale both collapsed, leading analysts to be optimistic that the authorities' charges against Coinbase could be dismissed outright.
However, University of Kentucky law professor Brian L. Frye is less confident in Coinbase and CFAT's legal arguments.
“This case is interesting, but in my opinion it's very possible,” Frye said. Decryption. “While we believe the effort to devise a clear test for distinguishing between securities and non-securities was the right strategic move, their test may be more restrictive to the SEC than the courts recognize. I think there is.”
The SEC's Howey Test defines an investment contract as an investment of money in a public corporation with the expectation of profit from the efforts of another. As Frye explained, CFAT attempts to argue that most cryptocurrencies should fail the test because they do not give holders a direct stake in a “public corporation.”
“Smart, but I don't think it will fly,” Frye said. “The same is true for most (almost all!) shareholders.”
On Wednesday, it was confirmed that one of the SEC's crypto division's top lawyers has left the SEC in favor of a private sector role that could potentially begin supporting the crypto industry.
Edited by Andrew Hayward
