Until a new presidential administration took office, the digital asset sector was caught in a critical confrontation with the U.S. Securities and Exchange Commission (SEC). For many years, the SEC conducted an aggressive regulatory enforcement approach against the digital asset ecosystem and its major platforms, often acting without clear guidelines regarding what qualifies as a security and who is required to register for trading. However, with the change in leadership, the SEC has officially indicated the conclusion of its era of regulation through enforcement.
This change has significantly lessened (though not completely removed) the risk of regulatory lawsuits from the agency. Nonetheless, the industry must brace itself for private litigants who might take advantage of this enforcement gap to maintain, at least temporarily, the uncertainties surrounding the application of federal securities laws by initiating lawsuits in U.S. courts. These claims may assert that specific digital assets qualify as securities, targeting companies and their executives for allegedly failing to disclose critical information or committing other violations of securities laws.
The SEC’s Policy Shift
With new leadership in place, the SEC has officially announced the cessation of its regulation-by-enforcement strategy and has initiated substantial efforts to advance its policy objectives, emphasizing the prosecution of fraudulent activities within the digital asset sphere. Key changes in regulatory focus include:
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Formation of a Crypto Task Force: Shortly after taking office, Acting Chair Commissioner Uyeda unveiled the establishment of a “Crypto Task Force.” This move acknowledged the prior confusion surrounding the SEC’s previous lack of rulemaking and reliance on enforcement actions. The goal of the task force is to clarify legal standards and develop a regulatory framework for digital assets, including roundtable discussions to help define which digital assets should be classified as securities.
- Creation of the Cyber and Emerging Technologies Unit: The SEC restructured its approach by substituting the Crypto Assets and Cyber Unit with the Cyber and Emerging Technologies Unit (CETU), aimed at safeguarding "retail investors from fraudulent activities.” CETU, now staffed by 30 fraud specialists and attorneys (a reduction from over 50), will concentrate on fraud concerning blockchain technology and crypto assets, among other areas.
These developments suggest a noticeable decrease in SEC enforcement within the digital asset domain, as the agency will no longer primarily use enforcement actions to shape its regulatory framework, coupled with a reduction in personnel focused specifically on blockchain and cryptocurrency issues. The SEC has stated its commitment to continuing to pursue fraudulent actors, with Commissioner Hester Peirce clarifying that this shift in prioritization does not equate to a complete halt in enforcement; existing statutes will still apply.
Ambiguous Laws Present Litigation Opportunities
As the SEC steps back from enforcement, individuals and businesses should prepare for private plaintiffs to exploit this gap. Historically, when regulatory enforcement retreats, the private legal sector often steps in, pursuing cases that allege violations of federal antitrust laws or financial misconduct under securities laws, as seen after the 2008 financial crisis. These private actions, frequently filed as class actions, can become costly and burdensome for companies and their founders, even when they prevail early in the proceedings.
In the context of digital assets, private litigants may utilize federal securities laws to argue a variety of claims, such as:
- Offering unregistered securities;
- Selling securities with misleading prospectuses (e.g., in white papers);
- Engaging in securities fraud and related misconduct (like rug pulls or pump-and-dump schemes);
- Holding accountable individuals with decision-making authority over the entity, such as founders or company executives.
Furthermore, plaintiffs may also seek to address alleged breaches of state securities laws and other common law claims.
While the SEC’s recent interpretation of securities laws is more in line with industry perspectives, it does not impose any judicial limits. For instance, private litigants have taken action against the TRON Foundation and its executives for allegedly misleading investors through the promotion and sale of TRX, which they contend is a security in violation of federal and state laws. In late 2022, the U.S. District Court for the Southern District of New York partially rejected the defendants’ motion to dismiss, pointing out that the SEC’s previous criteria for identifying securities in the crypto space represented merely a “nonbinding interpretation.”
Despite appellate court decisions being binding on lower courts, the SEC recently dismissed a case (involving Coinbase) that was under appellate review concerning whether certain crypto transactions classify as securities. Another similar case is expected to be dismissed soon, which means lower courts will continue to navigate this ambiguity without higher court guidance, allowing private litigants to assert that federal securities laws are applicable.
Consequently, firms should anticipate a rise in private litigation. One area of focus is meme coins, which prompt substantial debate regarding whether they should be defined as securities. Private plaintiffs are likely to argue that specific circumstances surrounding a meme coin could place it squarely within the scope of federal securities regulations.
This year has generally favored the digital asset sector, freeing it from the grasp of an agency that seemed intent on its downfall. Yet, businesses and their founders evaluating their legal exposure should consult with their legal experts to assess the potential risks of increased private litigation and devise strategies to mitigate such risks.