Crypto.com’s Mission to Seek Regulatory Clarity for Digital Assets

By: Cheryl L. Isaac, Judith Rinearson, Eden L. Rohrer, and Joshua L. Durham

On 8 October, Crypto.com made two novel, strategic moves to seek regulatory clarity regarding the classification of digital assets. First, the digital asset exchange sued the SEC, claiming that the SEC exceeded its statutory authority with respect to its classification of digital assets as securities without any notice-and-comment rulemaking as required under the Administrative Procedure Act (APA). Second, Crypto.com’s affiliate that is a CFTC-registered derivatives exchange petitioned the SEC and CFTC to provide a joint interpretation on how its swap products should be governed by the agencies.

Crypto.com’s Lawsuit

Crypto.com seeks injunctive relief requesting that the SEC’s “de facto” rule defining digital assets as “Crypto Asset Securities” be set aside and it be enjoined from enforcing it. Crypto.com also seeks declaratory relief that the digital assets sold on its platform are not securities nor sold as securities transactions, and that it is not operating as an unregistered securities broker-dealer/clearing agency.

Crypto.com notes the SEC’s current position that nearly all secondary market trades of digital assets (except BTC and ETH) are securities transactions. Crypto.com cited several SEC enforcement actions against other digital asset exchanges in which the SEC alleged that the platforms unlawfully offered “Crypto Asset Securities.” Crypto.com’s complaint argues that such actions are beyond the scope of the SEC’s authority, and that the agency cannot lawfully regulate such secondary market transactions without further action from Congress and without undertaking APA rulemaking procedures.

Crypto.com asserts that the SEC’s enforcement actions claiming that certain digital assets are themselves investment contracts, regardless of how they are traded or packaged, diverges from well-settled precedent, and that the SEC has essentially taken the view that when a digital asset is sold, it is always a security, regardless of the manner of sale.

Petition

Crypto.com’s affiliated derivatives exchange invoked a rarely used mechanism to request a formal stance from the CFTC and SEC on the classification of its derivative products. CFTC Regulation 1.8(a) and SEC Regulation 3a68-2 permit any person to petition these agencies to make a joint interpretation on whether a derivatives product is governed by the SEC, CFTC, or by both. Following receipt, the agencies have 120 days to either (i) issue a joint interpretation, in consultation with the Federal Reserve, (ii) issue a joint proposed rule, in consultation with the Federal Reserve, or (iii) deny an interpretation, and publicly provide the agencies’ reasoning. The SEC and CFTC may also seek public comment before issuing a joint interpretation, which would stay the 120-day timeline until the close of the comment period. Regardless of the outcome, Crypto.com’s petition will force the SEC and CFTC to engage on these threshold issues and make a public statement related to the classification of the digital assets underlying the derivatives products. 

While there is uncertainty regarding the outcome of the lawsuit and petition, Crypto.com’s bold moves could lead to regulatory clarity. We and the digital asset industry will be following these developments closely.