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The SEC suffered a significant loss last week in its ongoing legal battle with Ripple over the XRP digital token. While the District Court held that Ripple’s initial sales of XRP to institutional investors constituted the sale of unregistered securities, it was a Pyrrhic victory as the court held that all other ways in which Ripple sold or distributed XRP did not involve the sale of unregistered securities. In particular, the court held that Ripple’s program to sell XRP to public buyers on digital asset exchanges, as well as its distribution of XRP as compensation to employees and third parties, did not constitute the offer or sale of securities. The court also rejected the SEC’s arguments that Ripple used the institutional buyers as underwriters to sell XRP to the public. The opinion, if followed by other courts in pending litigation with the SEC, could have a far-reaching impact on the cryptocurrency markets, especially with respect to secondary market crypto trades on digital asset exchanges.               

The gloves are off. The SEC’s recent enforcement actions against leading crypto exchanges suggest that the SEC has decided that time’s up for the crypto industry as it currently exists in the United States.

After spending years urging industry participants to come in and register, the SEC has made clear, by going after some of the biggest players in the space, that it does not intend to tolerate exchange operators’ offering of unregistered crypto trading in the United States, at least as to retail investors where the tokens are securities. From the SEC’s perspective, most crypto tokens are securities, so, if a company wants to provide the securities-like infrastructure to trade those tokens, it must be registered with the SEC – whether as an exchange (matching buyers and sellers), a broker-dealer (trading crypto on behalf of others), or a clearing agency (facilitating trade settlement).

In the first insider trading case involving cryptocurrencies, a crypto trader was convicted of insider trading in federal district court and recently sentenced to 10 months in prison.

The defendant, Nikhil Wahi, pleaded guilty in the U.S. District Court for the Southern District of New York to illegally trading on information tipped by his brother, a former Coinbase product manager. According to his plea, Wahi used that information to trade on 40 different kinds of crypto assets were scheduled to be listed on the Coinbase platform between April 2021 and July 2022, when he was arrested. Prosecutors alleged that Wahi used those tips to sell crypto assets for a profit. Under the terms of the plea agreement, Wahi agreed to serve ten months in prison. Wahi’s brother, Ishan Wahi, has pleaded not guilty and is due to appear in court in March.

The crimes charged against SBF are simple — old-fashioned fraud through a Ponzi scheme.  His conviction seems inevitable. For the government, the challenging part of this case will be the forfeiture proceedings.  Under the Mandatory Victim Restitution Act (MVRA), federal prosecutors have an affirmative obligation to use their “best efforts” to…

SEC Division of Enforcement Director Gurbir Grewal and several high-ranking officials from the U.S. Attorney’s Offices for the Southern and Eastern Districts of New York and the FBI spoke on November 29, 2022 at a conference sponsored by Sandpiper Partners LLC concerning hot topics in SEC and DOJ enforcement.  The panelists all made clear that the views they expressed were their own, but those views are worth hearing.

Both the head of the Commodity Futures Trading Commission (CFTC) and leader of the SEC agree that the crypto markets need regulating, and specific rules may help clarify which agency has authority to regulate various cryptocurrency activities. The client alert below discusses both CFTC Chairman Rostin Behnam’s comments and SEC…

SEC Chair Gary Gensler appears to be readying the SEC for increasing oversight of cryptocurrency exchanges, the latest in a series of regulatory actions targeting the growing industry.

In prepared remarks at PLI’s recent SEC Speaks conference, Gensler called on cryptocurrency platforms to register each function they perform with the SEC – for example, requiring crypto dealers, brokers, and lenders to separately register those functions with the SEC. Such a move could result in a dramatic shakeup in the crypto market, where there are currently several cryptocurrency platforms that perform all of these functions. This is in stark contrast to the traditional securities markets, in which such services are separated from each other.

In late-July, the U.S. Securities and Exchange Commission brought insider trading charges against a former manager at Coinbase—the largest crypto asset trading platform in the United States. The charges are the latest move in the agency’s efforts to regulate cryptocurrency, and could spur an increase in cryptocurrency-related securities litigation.