SEC goes after Cumberland, Tether’s biggest customer

Tether’s favorite market maker Cumberland Global has been targeted by America’s securities regulator, potentially bringing the world’s leading stablecoin issuer closer to a regulatory reckoning.

On October 10, the U.S. Securities and Exchange Commission (SEC) announced the filing of a civil complaint against Cumberland DRW LLC in the U.S. District Court in the Northern District of Illinois. The SEC accuses Cumberland, an offshoot of the Chicago-based DRW Trading Group, of “operating as an unregistered dealer in more than $2 billion of crypto assets offered and sold as securities” since March 2018.

The complaint accuses Cumberland of earning “millions of dollars in ill-gotten gains” by buying and selling the aforementioned unregistered securities without registering as a securities dealer with the SEC. In doing so, Cumberland deprived investors and markets “of the protections of the federal securities laws’ registration provisions.”

The SEC says Cumberland has allowed “more than 1,500 high-net-worth individuals and entities” to act as counterparties on Cumberland’s Marea online trading platform since the platform’s launch in early 2019. These counterparties have included “prominent participants in the crypto asset space, such as funds managed by crypto asset investment firms and certain now defunct crypto asset hedge funds.”

Cumberland also engages in “discretionary risk-taking” by establishing long or short positions on various tokens, as well as “proprietary strategy trading” on third-party exchanges (including Binance, Bittrex, Coinbase (NASDAQ: COIN), Kraken and Poloniex). These and other operations generated over $400 million in revenue and $27 million in profits for Cumberland since 2019.

The SEC cited a “non-exhaustive list” of the tokens traded by Cumberland that the regulator considers unregistered securities: Polygon Technology (formerly MATIC, now POL); Solana (SOL); Cosmos (ATOM); Algorand (ALGO); and Filecoin (FIL). The SEC alleges that each of these assets “was offered and sold as an investment contract since inception.” These tokens represent “at least $2 billion” in Cumberland trading volume cited in the complaint.

Statements made by the issuers and promoters of these tokens “would have led objective investors to reasonably view” offers to buy or sell the tokens as “offers to purchase and sell investment contracts.” The SEC goes on to offer specific details on how these tokens trigger the various planks of the Howey test for identifying securities that require registration with the SEC.

The SEC is seeking to permanently bar Cumberland from further violations of the Exchange Act, as well as force Cumberland to disgorge (with interest) all illicit trading profits obtained via the illegal conduct alleged in the complaint.

Cumberland says ‘bring it’

In response, Cumberland issued a defiant statement calling itself “the latest target of the SEC’s enforcement-first approach to stifling innovation and preventing legitimate companies from engaging in digital assets.”

Cumberland claimed to have “engaged in five years of good-faith discussions with the SEC” regarding whether its transactions involved unregistered securities. But the complaint allegedly marks “the first time the SEC has outlined the specific transactions at issue.”

Cumberland “acquired a registered broker-dealer in 2019,” but claims the SEC informed it that “we could only use our broker-dealer to trade BTC or ETH,” which Cumberland insists are commodities and thus not under the SEC’s jurisdiction.

Cumberland stated that it won’t be “making any changes to our business operations or the assets in which we provide liquidity” as a result of the SEC’s complaint. Cumberland claims to be “confident in our strong compliance framework and disciplined adherence to all known rules and regulations.”

Cumberland recalled its parent company’s successful legal fight with the Commodity Futures Trading Commission (CFTC) back when it was led by current SEC chair Gary Gensler. Having previously prevailed over “overzealous regulators wielding their power in ways that harm rather than benefit the market,” Cumberland stands “ready to defend ourselves again.”

Tether ties

In 2021, Cumberland was revealed as the largest recipient of USDT (Tether) issued at the time, ahead of even the now defunct Alameda Research, the corrupt offshoot of Sam Bankman-Fried’s equally corrupt FTX digital asset exchange.

Given its USDT whale status, Cumberland would be in a prime position to confirm or deny Tether’s oft-repeated historical claim that it only issued USDT after receiving an equal amount of U.S. dollars. Tether has since introduced some wiggle room into this benchmark, admitting that it sometimes accepts digital assets like BTC in lieu of dollars, or even loaning USDT to people Tether appears to believe are good for it.

Just FYI, the SEC’s complaint against Cumberland came hot on the heels of the Department of Justice (DOJ) criminal charges against a handful of minor market makers for manipulating the prices of several memecoins (as well as BTC).

It’s worth remembering that the DOJ’s charges reportedly began with an SEC probe that ultimately uncovered sufficient evidence of criminality to warrant bringing in the DOJ. Past isn’t always prologue, but there are some other harbingers of doom making the rounds.

Last week, the DOJ announced a $3 billion settlement with TD Bank for its violations of the Bank Secrecy Act and money laundering laws that benefited drug traffickers and other crooks. Over a six-year period, TD Bank failed to adequately monitor over $18 trillion worth of customer transactions, of which $670 million was transferred via money laundering networks.

In announcing the charges, U.S. Attorney General Merrick Garland claimed that “by making its services convenient for criminals, TD Bank became one … TD Bank chose profits over compliance with the law—a decision that is now costing the bank billions of dollars in penalties.”

Those words may prove prophetic for Tether, given USDT’s well-earned reputation as the top ‘crime coin’ utilized by pig butchering scammers, money launderers, drug traffickers, terrorists and other toxic corners of humanity. Tether’s executive ranks may give U.S. shores a wide berth, but Cumberland enjoys no such luxury.

Garland said the DOJ wasn’t finished filing prosecutions in this case. Guess we’ll just have to wait for the other shoe to drop.

Bitnomial ain’t waiting

Meanwhile, other ‘crypto’ operators aren’t waiting for Gensler & Co. to come knocking at their door. On October 10, the Chicago-based Bitnomial ‘crypto futures & options’ exchange filed a complaint against the SEC, accusing the regulator of asserting jurisdiction over “futures contracts on a digital asset,” specifically, futures involving the XRP token issued by Ripple Labs.

Bitnomial’s suit notes that the company—a CFTC-approved designated contract market—informed the CFTC in August of its plans to start offering an XRP U.S. Dollar Futures contract. Bitnomial was quickly contacted by the SEC, which warned that XRP Futures are security futures subject to joint CFTC/SEC jurisdiction.

The SEC has waged a long (and ongoing) fight with Ripple over the question of whether XRP represents an investment contract. Bitnomial rejects the SEC’s view that XRP is a security but also claims that registering XRP with the SEC is impossible. As such, the SEC “has effectively blocked Bitnomial from listing XRP Futures.”

Bitnomial wants the U.S. District Court for the Northern District Of Illinois to (a) declare that XRP Futures aren’t security futures and (b) enjoin the SEC “from asserting jurisdiction over XRP Futures or initiating or pursuing any enforcement action against Bitnomial relating to its contemplated listing of XRP Futures.”

Bitnomial isn’t the first to file a pre-emptive suit against the SEC. Last week saw the Crypto.com exchange file its legal broadside after it received a Wells notice from the SEC indicating an enforcement action against the exchange was imminent.

The Ethereum-based blockchain software outfit Consensys tried filing a similar suit in April, but this suit was dismissed last month by a federal judge who reminded Consensys that it had yet to suffer any harm at the SEC’s hands, so cool your jets already.

The call is coming from inside the house

Cumberland’s pejorative view of the SEC’s anti-crypto actions was echoed by SEC commissioner Mark Uyeda, who last week told Fox Business that the SEC’s “policies and our approach over the last several years have been just really a disaster for the whole [crypto] industry.” Uyeda claimed that a lot of SEC crypto enforcement activities involved “non-material things that are not going to change the bottom line.”

Uyeda claimed there was “a broader frustration with the fact that [the SEC has] not provided interpretive guidance as to what you can and cannot do and if you are involved in some sort of securities offering.” Uyeda said there was a “need to lay out some clear guidance and interpretations on what exactly falls within and falls outside of these securities laws.”

But as others have noted, the SEC’s official position remains that existing securities laws are clear enough for ‘crypto’ operators to understand where the lines are drawn. As Gensler himself recently put it, “not liking the rules is not the same as there aren’t rules.”

Gensler caught some heat from law students last week during a ‘fireside chat’ at New York University Law Institute for Corporate Governance and Finance. Challenged as to whether the 1946 Supreme Court ruling that established the Howey test is the best barometer for identifying securities, Gensler said like it or not, “it’s the law of the land.”

Gensler also noted last month’s Federal Bureau of Investigation (FBI) report that found the dollar value lost to crypto-linked fraud was up 45% last year to $5.6 billion, tartly noting there were “a lot of fraudsters, a lot of grifters, a lot of scams” in this sector. Gensler summed up with this cutting remark: “With all respect, the leading lights of this field … are either in jail or awaiting extradition right now.”

Watch: Teranode & the Web3 world with edge-to-edge electronic value system

Source