Crypto.com v. SEC Is a Bold, ‘Bet the Company’ Case

Last week, you probably saw that the cryptocurrency exchange Crypto.com sued the SEC. Maybe you moved on with your day, or read on to see that the company is “seek[ing] declaratory and injunctive relief to prevent the Securities and Exchange Commission (‘SEC’) from unlawfully expanding its jurisdiction to cover secondary-market sales of certain network tokens.”

If you’re like me, you probably didn’t process this as big news. After all, cryptocurrency projects are suing or being sued by the SEC all the time, and none of these have moved the needle. Crypto.com CEO Kris Marszalek said it filed the complaint to “protect the future of crypto” and, with all due respect, that kind of grandiose rhetoric made me think this case was just a posturing exercise.

When I dug a little bit, though, this Crypto.com began to look different. When I worked in Big Law, I specialized in what some people call “bet the company” litigation, and what Crypto.com set in motion in Texas last week might be just that.

Aaron Brogan is a managing attorney at Brogan Law PLLC.

Crypto.com’s complaint revealed it received a Wells notice from the SEC on Aug. 22. A Wells notice is a letter from the SEC telling you you’re about to be sued. After you get one you present evidence that you are in compliance and beg the regulator not to bring the case, but more likely than not, one day soon, you’re getting summoned to court.

The SEC apparently accused Crypto.com of “operating as an unregistered broker-dealer and securities clearing agency” based on its business of facilitating secondary market trade in cryptocurrency tokens. This is because the SEC believes those tokens belong to a category of asset it classifies as “crypto asset securities,” over which it asserts authority.

Crypto.com could have just waited, but instead it took action. The way it did so suggests to me the company believes this case is existential.

First of all, the firm hired Noel Francisco, a former U.S. Solicitor General, to represent it. Former Solicitor Generals like Francisco and Uniswap’s counsel Don Verrilli represented the United States government in the Supreme Court. They are among the very best and most experienced appellate litigators in the country, and, one can safely guess, among the most expensive. You don’t hire Noel Francisco to posture. You hire Noel Francisco to go to war.

Around the same time, Crypto.com moved its U.S. headquarters from Florida to Tyler, Texas. This could be totally innocuous and unrelated to the litigation. But the move preceded this action by only five days, and placed Crypto.com squarely in the jurisdiction of the United States District Court for the Eastern District of Texas (E.D.Tex). E.D.Tex., long famed for being the home of patent “forum shopping,”
is well known as one of the most conservative in the country, particularly when it comes to the authority of federal agencies.

Even more important than the district court is the appellate circuit it sits in. The Fifth Circuit Court of Appeals is the single most influential court for anti-agency jurisprudence in the country. One recent case out of the circuit, Jarkesy v. SEC, significantly limited the SEC’s authority, and, when affirmed by the Supreme Court, changed the country’s judicial landscape. There are many reasons you might want to move your company to Texas, but if you’re in a fight to the death with the SEC, the Fifth Circuit is where you want to have it.

Crypto.com’s case is a little fiddly, to be fair. It relies on a judicial maneuver called a “declaratory judgment” that allows courts to “terminate controversies” concerning the “existence or nonexistence of any right, duty, power, liability, privilege, disability, or immunity or of any fact upon which such legal relations depend, or of a status.” These actions can be very difficult to prosecute because of the related doctrines of “justiciability” and “ripeness” through which courts abstain from “entangling themselves in abstract disputes.” Fundamentally, a declaratory judgment asks a court to determine rights in a forward-looking way, before a controversy arises, and courts prefer to wait for the controversy. Consensys just lost a declaratory judgment action in the Northern District of Texas for this reason, and the same could happen here.

But if it doesn’t, and the Wells notice Crypto.com received forms a sufficient basis for a declaratory action to proceed, Crypto.com may have perfectly aligned all the dominoes to finally knock down Chair Gensler’s regime. This action cuts across the SEC’s entire authority to regulate the cryptocurrency industry by challenging the bedrock upon which it is all built, the “crypto asset security.” Crypto.com argues that this category is made up out of “whole cloth” and cannot form a cogent basis for an enforcement authority consistent with the Administrative Procedure Act (APA). The company cites case law from New York and D.C. district courts saying much the same, that “it is necessary to distinguish between the digital coins themselves and the offers to sell them” and that secondary market sales of cryptocurrency are not investment contracts.

And so, somehow, Crypto.com has reached the precipice. If it wins the first “ripeness” issue and is allowed to bring its case, little stands in its way. Its arguments on the merits are strong, and there are few courts more sympathetic to those arguments than E.D.Tex. From there it would go to the Fifth Circuit, the court the SEC fears the most. And then, just maybe, the Supreme Court, where it would have a sympathetic panel and one of the most experienced appellate attorneys in the country to make its case.

I don’t know how this case will turn out, but pay attention. If it wins, Crypto.com could change the game.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

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