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After late 2022 was dominated by the fall of FTX and arrest of Sam Bankman-Fried, 2023 has seen an unprecedented level of enforcement activity involving cryptocurrency exchange platforms. The United States Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have brought significant actions against these platforms for, among other things, failing to register with regulators. The “wild west” era of cryptocurrency appears to have ended, and a new era of stricter enforcement is on the horizon. Yet, some crypto exchanges have asserted that while they have sought common ground with regulators, there does not appear to be a path to registration under current law.

The aggressive enforcement by both the SEC and CFTC may soon bring the two regulators into conflict, as both have sought to aggressively expand their jurisdiction in the cryptocurrency space. Whether a given token is properly considered an investment contract, a currency, and/or a commodity will determine whether the SEC, the CFTC, or both can legally regulate. Current enforcement actions may provide additional clarity on this jurisdictional issue.

The first few months of 2023 have brought several enforcement actions against large participants in the crypto industry, which demonstrate the government’s recent aggressive enforcement posture:

  • On March 22, 2023, the SEC reportedly issued a Wells notice to crypto exchange Coinbase regarding an unspecified portion of its listed digital assets and staking service after the SEC’s investigation.
  • On March 27, 2023, the CFTC sued crypto exchange Binance and its founder, CEO Changpeng Zhao, for trading and derivatives laws violations, alleging that the crypto exchange offered its derivatives trading services to U.S. customers without applying for a derivatives license.
  • On March 29, 2023, the SEC filed suit against Beaxy Digital, Ltd. for operating an unregistered exchange, brokerage, and clearing business simultaneously.
  • On April 18, 2023, the SEC sued the crypto asset trading platform Bittrex, alleging it failed to register its exchange, brokerage, and clearing agency.

In addition, a summary judgement ruling appears imminent from Judge Analisa Torres in S.E.C. v. Ripple Labs, Inc., No. 1:20-cv-10832 (S.D.N.Y.), that could provide key caselaw analyzing whether crypto assets are securities or commodities.

While lax enforcement is a thing of the past, government agencies have been slow to provide clarity or guidance with respect to how these exchanges can operate legally. That could change, however, as the SEC has taken steps to craft a rule that expands the definition of an “exchange” requiring registration and takes aim at decentralized finance (“DeFi”) platforms. While the SEC has repeatedly taken the position that existing regulations cover the vast majority of cryptocurrency exchanges, this potential rulemaking could be a harbinger of additional regulation to come.

Companies operating within the cryptocurrency realm will need to continually assess their risks and should consult with outside counsel as these enforcement actions unfold and the SEC considers whether to promulgate regulations in this space.

SEC Continues Focus on Staking with Wells Notice to Coinbase

In the latest example of the SEC’s focus on “staking,” the regulator issued a Wells notice to Coinbase on March 22, 2023. Staking is a way for holders of cryptocurrency to earn passive income from their investments. Users who “stake” their assets assist in the maintenance of the digital blockchain by “locking up” their coins to earn rewards. Certain blockchains use a proof-of-stake consensus mechanism to identify participants to validate new blocks of data being added to the blockchain. These “validators” must lock away a certain amount in tokens in order to ensure that they act honestly. In exchange for this, the validators receive rewards in cryptocurrency. Holders of cryptocurrency can delegate their stake to operators who do the actual labor of validating the blockchain transactions.

The SEC set its sights on staking earlier this year, when it settled charges with Payward Ventures, Inc. and Payward Trading Ltd., both commonly known as Kraken. The SEC alleged that Kraken failed to register the offer and sale of its crypto asset staking-as-a-service program. This was a program whereby investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent. As part of that settlement, Kraken paid $30 million to the SEC in disgorgement, prejudgment interest, and civil penalties, and agreed to immediately end its SaaS program.

The SEC asserted that Kraken’s staking service should have been registered with the SEC as a securities offering. But SEC Commissioner Hester Peirce criticized the enforcement action, asking whether Kraken even could have registered if it wanted to:

Whether one agrees with that analysis or not, the more fundamental question is whether SEC registration would have been possible. In the current climate, crypto-related offerings are not making it through the SEC’s registration pipeline. An offering like the staking service at issue here raises a host of complicated questions, including whether the staking program as a whole would be registered or whether each token’s staking program would be separately registered, what the important disclosures would be, and what the accounting implications would be for Kraken.

Commissioner Peirce called for the SEC to issue guidance on staking, rather than regulating the activity by enforcement. “That our solution to a registration violation is to shut down entirely a program that has served people well,” Commissioner Peirce stated, is the mark of a “paternalistic and lazy regulator.”

Notwithstanding Commissioner Peirce’s comments, the SEC appears highly skeptical of staking-as-a-service. When the settlement with Kraken was announced, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated that Kraken, through its staking program, “offered investors outsized returns untethered to any economic realities” and “provided them zero insight into, among other things, its financial condition and whether it even had the means of paying the marketed returns in the first place.”

A potential enforcement action against Coinbase, another cryptocurrency exchange platform, seems to indicate that Commissioner Peirce has not swayed her fellow commissioners.

On March 22, 2023, Coinbase disclosed that it had received a Wells notice from the SEC, and that the Wells notice relates to the Coinbase staking service, its crypto investment platform, and its wallet. A Wells notice is a formal notice that SEC staff intend to recommend an enforcement action. According to a statement from Coinbase, the SEC declined to specifically identify which assets on its platforms the SEC believes are securities. Coinbase claims it does not list securities or offer products to customers that are securities, and it contends that its staking services, which the SEC was first alerted to in 2019, are not securities either.

Coinbase also asserts that it attempted to register these services with the SEC, but that there is no existing way for a crypto exchange to actually register. In fact, Coinbase claimed that it met with the SEC more than 30 times over the course of nine months, and proposed two different “registration models,” but received no feedback. 

After receiving the Wells notice, Coinbase called publicly for more regulatory guidance, not more enforcement. The likely enforcement action against Coinbase leaves little doubt that the SEC will work to expand the scope of its jurisdiction over cryptocurrency platforms, including by classifying staking-as-a-service programs as securities offerings. While Kraken’s settlement foreclosed the possibility of a judge considering whether the SEC’s position is sound, Coinbase appears poised to put the SEC’s approach to the test.

Cryptocurrency as a Commodity: Binance Sued by CFTC

On March 27, 2023, Binance, was sued by the CFTC, which regulates the U.S. derivatives markets, for allegedly offering unregistered derivatives products and helping U.S.-based customers sidestep compliance controls. Binance is the largest cryptocurrency exchange by trading volume. According to the CFTC, Binance had a stated policy of blocking or restricting customers located in the United States. However, Binance and its executives, including its CEO and co-founder Changpeng Zhao, allegedly undermined this compliance program—through loopholes and lax enforcement—in an effort to allow certain U.S. customers to use the platform. On April 12, 2023, Rostin Behnam, the head of the CFTC, doubled down, stating of Binance executives, “[t]hese are not unsophisticated individuals. . . . They are starting large companies and offering futures contracts and derivatives to U.S. customers.”

While Binance solicited and relied on U.S. customers, it failed, according to the CFTC, to register with the CFTC in any capacity and ignored Know Your Customer and anti-money laundering laws.

Most important to the broader crypto industry, however, the CFTC complaint states that Binance has facilitated transactions involving bitcoin, ether (ETH), and litecoin (LTC) as well as certain stable coins, each of which the CFTC alleges are commodities. While SEC Chair Gary Gensler has stated publicly that Bitcoin is likely a commodity, he has refused to say the same for any other token. Indeed, whether ether, in particular, is a security or a commodity has been hotly debated among commentators and subject to conflicting statements from regulators. The CFTC’s Behnam, in his April 12, 2023 speech, reiterated that ether, the world’s second-largest cryptocurrency is, in the eyes of his agency, a commodity. The CFTC’s action against Binance could advance the CFTC’s position in the ongoing regulatory turf-war.

SEC Brings Suit Against Beaxy for Mixing Trade Platforms and Failing to Register

The SEC sued and several executives on March 29, 2023, for operating an exchange, brokerage, and clearing business simultaneously, none of which were registered. SEC Chair Gensler had previously stated that crypto “intermediaries” frequently commingle multiple functions, which creates an inherent conflict of interest. This is the first such action against a crypto exchange platform. Beaxy Digital, Ltd. is alleged to have violated securities law through the unregistered offering of the BXY token.

As part of the settlement, the individuals and companies agreed to pay civil penalties that totaled $165,200. It also required to shut down its website, effectively ceasing operations.’s webpage indicates that it has shuttered operations “due to the uncertain regulatory environment surrounding [its] business.”

SEC Suit Against Bittrex Indicates Continued Focus on Registration of Exchange Platforms

In an action reminiscent of the suit against Beaxy, the SEC, on April 17, 2023, brought suit against Bittrex for operating a securities exchange, broker and clearing agency without registering any of the three services with the SEC. The complaint also alleged that Bittrex worked with issuers on its platform to scrub any statements that might lead the SEC to investigate, such as mentions of expectations of profits or price predictions.

Bittrex had previously stated that it intended to exit the United States market by April 30, citing “the current U.S. regulatory and economic environment.”  

Security vs. Commodity: Ripple Ruling in S.D.N.Y. Could Bring Clarity

As the SEC and CFTC seek to expand their jurisdiction over crypto exchange platforms, a judge in the Southern District of New York is set to weigh in on whether Ripple’s native XRP token is a security. The SEC brought a lawsuit against Ripple, a company that provides the infrastructure for cross-border payments, in December 2020, alleging that the company and its executives illegally sold XRP, a cryptocurrency on which Ripple’s services are based, to investors without registering it as a security. The SEC has argued that XRP should be classified as a security, which Ripple denies. Summary judgment briefing was finalized in December 2022, and a ruling from the District Court for the Southern District of New York is likely upcoming.

Companies throughout the industry have frequently argued that native tokens—tokens minted for use on a blockchain—generally do not qualify as securities. Native tokens are utility tokens, meaning they have an actual use on their native blockchain, and therefore, are not investment contracts pursuant to the Howey test. A recent ruling in SEC v. LBRY Inc., 1:21-cv-00260, dealt a blow to that theory. In November of 2022, a federal judge in New Hampshire ruled that LBRY offered LBC, it’s native token, as a security, despite LBRY’s argument that the token had an independent use case on its native blockchain.

The industry will be closely watching to see whether Judge Torres follows the reasoning of LBRY. A ruling in favor of the SEC and a finding that XRP is a security could impose stricter requirements on XRP in particular and native tokens more broadly. Such a ruling would provide some support for the SEC’s broad definition of a securities offering and could set a precedent that the sale of native tokens constitutes a securities offering.

Possible SEC Rulemaking Seeks to Bring Decentralized Crypto Exchanges into Regulatory Fold

As it steps up enforcement, the SEC appears poised to engage in rulemaking involving certain cryptocurrency exchanges. Over a year ago, in January 2022, the SEC proposed a rule that would expand the definition of the word “exchange.” Despite the fact that the proposed rule did not mention “crypto” at all, it led many to believe that the SEC’s proposal was targeting the cryptocurrency industry, particularly DeFi platforms.

On April 14, 2023, the SEC reopened last year’s proposal and its amended language now uses language that directly includes DeFi. SEC Chair Gensler has stated in the past that most cryptocurrency exchanges are securities exchanges. Director of Enforcement Grewal has echoed the position, for quite some time, that centralized cryptocurrency exchange platforms must register. Statements by Gensler and Grewal, coupled with this recent announcement, may indicate that formal rulemaking addressing cryptocurrency exchanges more broadly may be on the horizon.  

Key Takeaways

As these actions demonstrate, the SEC and CFTC are committed to tougher regulation of cryptocurrency exchange platforms, and likewise appear committed to expanding their own jurisdiction. Many in the industry, however, have faulted regulators for declining to engage in good faith with proposals from stakeholders and failing to provide sufficient guidance to market participants. More to the point, allegations that there is no path for such platforms to register—allegations that have come both from Coinbase and SEC Commissioner Peirce—raise serious questions as to whether it is possible for certain cryptocurrency companies to operate legally.

Many cryptocurrency exchanges are operating in similar fashion to Coinbase, Binance, and Ripple—without clear guidance from federal regulators. If Coinbase and Commissioner Peirce are to be believed, certain exchange platforms must register to operate legally, but there is no clear path to registration at this time. Unless and until regulators provide clear guidance, the current regime creates the impression that the initiation of cryptocurrency enforcement actions is arbitrary.

While cryptocurrency’s registration and enforcement framework is still being established, there can be no doubt that SEC and the CFTC have made cryptocurrency enforcement a priority, with the SEC continuing to aggressively hire lawyers in the Division of Enforcement’s Crypto Assets and Cyber Unit. The consequences that clients could suffer are serious and could include ceasing operations or moving abroad to friendlier crypto jurisdictions. Clients must closely monitor regulatory developments to ensure compliance moving forward. Buchanan’s Blockchain and Digital Asset Practice Group stands ready to answer any questions in the ever-shifting cryptocurrency landscape.