Crypto.com Sues SEC to Challenge Classification of Network Tokens as Securities in Texas Court

As of October 8, 2024, Crypto.com has taken a significant step by suing the SEC in a Texas court. The exchange aims to block the regulator from enforcing securities laws against its operations.

This lawsuit follows an investigation into Crypto.com by the Securities and Exchange Commission. The focus is on “network tokens,” which include those from Solana, Binance, Cardano, and Algorand. These tokens are actively bought and sold on Crypto.com’s platform.

Kris Marszalek, the CEO of Crypto.com, shared on X that this lawsuit against a federal agency is a necessary response to the SEC’s approach of regulation through enforcement. The exchange is asking a federal judge to declare that the tokens in question, along with six others, should not be classified as securities. They also want the SEC barred from enforcing these laws against the company.

A complaint filed by Foris DAX, the parent company of Crypto.com, reveals that the SEC has been investigating them since February 2023. That’s when they first received subpoenas. In August, Crypto.com learned that the SEC’s enforcement division would recommend taking action against them.

Crypto.com isn’t alone in facing scrutiny. Under Chair Gary Gensler, the SEC has launched numerous enforcement actions against major players in the crypto space, including Coinbase, Consensys, and Kraken. The core issue in these cases is the SEC’s claim that tokens from networks like Cardano and Solana count as securities, even when traded on exchanges. This means they fall under the SEC’s jurisdiction.

To be classified as a security, an asset must meet specific criteria. Essentially, an asset isn’t a security on its own until it’s sold with the promise of future returns. Crypto.com operates as a secondary market, providing a platform for buying and selling tokens without making promises about them. These tokens are issued by their respective networks to reward operators and users.

The SEC has decided that these tokens are securities, but this ruling doesn’t directly involve Crypto.com. The exchange simply buys the tokens and allows trading. Historically, the SEC has recognized that secondary market sales of network tokens don’t qualify as securities.

However, since Gensler took office, the SEC has adopted a more aggressive stance on enforcement actions against crypto businesses. They’ve expanded their authority over secondary-market sales of network tokens and the broader digital asset industry. The SEC argues that network tokens are securities because their promoters have marketed them with the expectation that investors will profit. This holds true whether the token was bought directly from the issuer or on a secondary market.

As the SEC’s lawsuits against crypto firms move through the courts, they have seen some early successes. For instance, a judge in Coinbase’s case sided with the SEC, allowing the lawsuit to proceed. The judge indicated that transactions on the exchange might indeed be classified as securities.

On the flip side, as noted in Crypto.com’s filing, a judge in a separate case against Binance ruled that the SEC had not convincingly shown that a secondary market buyer would expect their investment to contribute to the network's development. This creates an interesting contrast in how these cases are being interpreted.