Crypto com sues the SEC for exceeding its authority and violating the Administrative Procedure Act

What’s new? Crypto exchange Crypto com reported that it has received a Wells notice from the US Securities and Exchange Commission (SEC). Such a document signals that the SEC has found irregularities in the company’s operations and is preparing to take the company to court. Without waiting for a lawsuit from the SEC, Crypto com itself filed a lawsuit against the regulator, accusing it of improperly expanding its own powers.

Press release

What else is known? Wells is an official notice from the SEC in writing. The agency sends it following an internal investigation into securities law violations, signaling plans for enforcement action. However, receiving such a paper does not always mean further litigation.

For example, last February, the fintech company Paxos received a Wells notice in connection with the issuance of BUSD stablecoins under the brand of cryptocurrency exchange Binance. In response, Paxos stopped issuing BUSD and Binance also stopped using them, replacing BUSD with FDUSD stablecoins. As a result, in July 2024, the SEC closed its investigation into Paxos.

Conversely, Wells was sent to crypto exchange Coinbase in March 2023. In July of that year, the regulator sued the exchange, and proceedings are still ongoing.

Coinbase through the court demanded information from the CFTC to defend itself against the SEC lawsuit

According to the exchange, the regulator’s correspondence with cryptocurrency issuers will allow it to prove that the coins mentioned in the lawsuit are not securities

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Also in April of this year, Wells was received by Uniswap, the developer of the largest DeFi protocol. So far, the story has not been further developed.

The SEC has been repeatedly criticized for the fact that it regulates the industry not by developing comprehensive guidance for crypto companies, but by filing individual lawsuits for violations of existing legislation that focuses on traditional financial market assets and does not take into account the peculiarities of cryptocurrencies. The commission has been criticized not only by industry representatives but also by congressmen.

As for Crypto.com, the company also writes in its new press release that the SEC continues its “unauthorized and unjust” campaign to force regulation of the industry.

In the lawsuit, Crypto.com claims that the SEC has arbitrarily expanded the scope of its authority and established an unlawful rule. Under the rule, nearly all crypto assets and transactions fall under the definition of securities transactions, regardless of the method of sale.

The only exceptions, according to the SEC, are bitcoin and Ethereum, the trading of spot exchange-traded funds (ETFs) based on which the commission authorized earlier this year. At the same time, the agency’s officials do not specify the criteria by which a particular crypto asset falls into one of two categories: security or commodity.

Crypto.com emphasizes that this SEC rule was adopted in violation of the Administrative Procedure Act, under which the commission was required to file a notice and hold public discussions.

In addition, even this SEC rule is applied arbitrarily, recognizing cryptocurrencies with almost identical characteristics to bitcoin and Ethereum as securities, the company emphasizes.

“While this is an unprecedented move for our company to file suit against a federal agency, actions by that agency towards our industry have left us no other choice. <…> We are doing so to protect the future of the crypto industry in the U.S., joining a series of our peers who are actively defending themselves and taking action against a misguided federal agency acting beyond its authorization under the law,” the press release says.

In addition to the lawsuit, Crypto.com has filed a petition with the SEC and a second market regulator, the Commodity Futures Trading Commission (CFTC). Its goal is to argue, through joint consultation on current law, that certain crypto derivatives available on the exchange are commodities and should only be regulated by the CFTC.

The exchange emphasized that it will use all available tools to clarify the rules of the industry. Both agencies should provide their interpretations of the legislation within 120 days.

The CFTC has a reputation for being a more lenient regulator compared to the SEC. In addition, the Lower House of Congress has already passed the Financial Innovation and Technology for the 21st Century Act (FIT21), which will clearly divide the authority to regulate the crypto sector between the two agencies. Crypto.com also speculated that the new presidential administration after the November elections will take a more constructive and effective approach to promoting cryptocurrencies in the United States.

Crypto.com is one of the leading global centralized exchanges (CEX). In July, it became the leader in spot and derivatives market trading volume growth among the largest trading platforms. In September, it received a license from the Central Bank of Bahrain.

As for the US, Crypto.com is registered with the CFTC and the Financial Crimes Enforcement Network (FinCEN) and has money transfer licenses in more than 40 states. These facts underscore the exchange’s commitment to compliance and increase its chances of winning its case against the SEC, the statement says.

Crypto.com has its own exchange token CRO, the asset is ranked 48th in the overall cryptocurrency market capitalization ranking with a market cap of $2 billion and is trading at $0,0747, having lost 7,6% overnight. The weekly drop was 10,8%, and the asset has fallen in price by 24% since the beginning of the year.

Last month, congressmen called on the SEC to repeal the rule to count customer crypto assets as liabilities. They also noted that the SEC adopted the rule arbitrarily, bypassing the Administrative Procedure Act.