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SEC’s Regulatory Authority over Crypto Assets Questioned

Enza G. Boderone & Philip R. Stein

Photo illustration of Cryptocurrency Green Nodes or Green BoxesThe regulatory authority of the U.S. Securities and Exchange Commission (“SEC”) over the cryptocurrency industry has recently been challenged on a couple of fronts. One involves a lawsuit filed by the SEC against a Utah-based company, Green United, LLC, its principal Wright Thurston, one of its promoters, Kirstoffer Krohn, and others. In March, the SEC filed claims that these defendants violated federal securities laws, alleging that they defrauded investors in connection with an unregistered offering of crypto assets. According to the complaint, the defendants raised at least $18 million in what the SEC calls an “unregistered offer and sale of investments” named “Green Boxes” or “Green Nodes.” The suit further alleges that the defendants claimed that those products mined a digital token called “GREEN.” The SEC maintains that, contrary to the representations made to investors, Green Boxes did not mine GREEN, but instead mined Bitcoin, which the SEC alleges was not transferred to investors. The Green Nodes purportedly also did not mine GREEN. 
Those defendants are attempting to throw out the suit based on the agency’s alleged lack of authority to assert the claims. They filed a motion to dismiss, arguing that the SEC lacks the requisite authority to bring these claims, and that Congress has previously rejected granting it such authority. Defendants further allege that the SEC’s definition of cryptocurrency is ambiguous and inconsistent and that the SEC fails to demonstrate that Green Boxes or Green Nodes constitutes securities offerings or investment contracts.
In another recent challenge to the SEC, Coinbase, the largest cryptocurrency trading platform in the U.S., filed a petition last month against the SEC in the Third Circuit Court of Appeals. The petition seeks to compel the agency to provide more regulatory clarity and guidance for the crypto industry. The SEC has not responded to the rulemaking petition because, according to Coinbase, the SEC has “its mind made up to deny the petition.” Coinbase further asserts that the SEC’s delay in formally announcing their decision is “improperly delay[ing] judicial review at a critical moment for the industry.” Coinbase contends that until recently, the SEC’s “words and actions” demonstrated that the securities laws do not apply to many digital assets, but that the SEC has abruptly changed positions, creating what it calls “disruptive uncertainty throughout the industry.” Coinbase seeks clarity as to which digital assets must be registered as securities, and how the registration requirements apply to digital assets. It reports that more than 1,700 other market participants have submitted comments “echoing that call for clarity” as the regulatory landscape of the cryptocurrency industry in the U.S. remains murky. On Wednesday, the Third Circuit Court of Appeals ordered the SEC to respond to the petition within 10 days.

In March, Coinbase announced that the SEC informed it of plans to initiate enforcement proceedings against Coinbase for allegedly listing unregistered securities. Therefore, this petition may be viewed by some as a preemptive attempt to get ahead of any enforcement actions by the SEC, but it is difficult to question Coinbase’s depiction of a current lack of clear regulatory guidance.
Critics and proponents of the crypto industry alike will be keeping a watchful eye on these two pending legal actions that may have a significant impact on the industry and the regulatory landscape pertinent to it.

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Speaking Engagement September 14, 2017
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