The outcome of Crypto.com’s lawsuit against the U.S. Securities and Exchange Commission could affect the operation and regulation of U.S. crypto markets and have broader implications for the SEC, according to an Oct. 28, 2024, Law360 analysis authored by McGuireWoods partner David Hirsch, counsel Garen Marshall and associate Rhea Shahane.
In its lawsuit filed in the U.S. District Court for the Eastern District of Texas, Crypto.com alleges the SEC exceeded its legal authority in asserting jurisdiction over nearly all crypto assets and improperly created a financial instrument known as the “Crypto Asset Security,” which is subject to regulation under the Securities Act and the Exchange Act.
“Success for Crypto.com would raise more questions about the SEC’s authority to regulate what it has described as crypto intermediaries, such as exchanges, broker-dealers and clearing agencies,” the authors wrote. “If the SEC loses regulatory authority, it is not clear that there is another agency ready to assume it.”
The authors noted the potential absence of regulatory oversight may lead crypto markets to expand rapidly. If successful, this case also could lead to increased litigation against the SEC “at a time when the commission faces increasing responsibilities and flat agency funding.”
If the SEC prevails, “platforms like Crypto.com may be required to meet the same registration and compliance obligations as traditional securities platforms, which would impose significant costs and regulatory burdens on these companies,” they wrote.
The authors said crypto companies should stay abreast of legal developments across jurisdictions, consider periodic legal and compliance reviews to keep pace with regulatory changes, and protect themselves from cyber vulnerabilities.
Hirsch is former chief of the SEC’s Crypto Assets and Cyber Unit in the Division of Enforcement. Marshall is a former assistant U.S. attorney in the Criminal Division of the U.S. Attorney’s Office for the Eastern District of New York, where he was most recently a member of the office’s National Security and Cybercrime Unit.
The Law360 article expands on an Oct. 14, 2024, analysis the authors wrote for McGuireWoods’ Subject to Inquiry blog.