The SEC May Signal New Crypto Enforcement Approach In Upcoming Court Filing
February 4, 2025
The Securities and Exchange Commission’s (“SEC’s”) response to a recently filed motion to dismiss may reveal the extent of its crypto-friendly stance, as the motion raises fundamental questions about the treatment of digital assets under federal law. The response may also provide a glimpse into how the Trump Administration will treat actions initiated by its predecessor.
In October 2024, the SEC filed a complaint alleging that Cumberland DRW LLC unlawfully operated as an unregistered dealer when it purchased and sold digital asset securities as part of its business.1 On January 15, 2025, Cumberland filed a motion to dismiss the SEC’s complaint, arguing that: (1) the SEC failed to allege facts sufficient to establish that Cumberland transacted in securities or was a securities dealer; (2) the major questions doctrine bars the suit; and (3) the SEC’s action violates Cumberland’s due process rights.2 Cumberland also frames the SEC’s case as yet another chapter in its “regulation-by-enforcement campaign.”3 The new administration’s more crypto-friendly SEC may agree, reconsider the litigation, and voluntarily dismiss its complaint as a symbol that regulation by enforcement is done.
Cumberland’s Motion to Dismiss Grounds
No Unregistered Securities
First, Cumberland argues that the SEC’s allegations do not establish that the relevant digital assets were securities at the time when Cumberland purchased and sold them.4 The SEC alleged that the digital assets at issue were securities because they were investment contracts under Howey.5 Cumberland contends that, even if the assets may have satisfied Howey when initially sold, its secondary-market transactions did not because Cumberland’s counterparties were not providing capital to be invested in a common enterprise, nor have the token developers made any commitments to “undertake efforts to earn Cumberland’s counterparties a profit” or use the funds to do so.6 Cumberland argues that the blind bid-ask secondary-market transactions prevent any reasonable expectation that the funds will go to developers to finance efforts to earn profits for those counterparties and thus fail to create any investor relationship.7
Other crypto companies have advanced this argument, albeit with mixed results. In moving for summary judgment in September 2022 on the SEC’s charges that it sold unregistered securities, Ripple Labs argued that its XRP token was not an investment contract under Howey because in many cases there were no investments of money, no common enterprise, and no reasonable expectation of profits by XRP holders.8 Ripple obtained a partial victory when the district court found that “programmatic sales [of Ripple’s token] did not constitute the sales of investment contracts,” as these buyers did not know who, or what, was receiving their money.9 The SEC has appealed the Ripple decision to the Second Circuit.10 A similar argument mounted by Terraform Labs did not fare as well. In denying Terraform Labs’ motion to dismiss the SEC’s complaint, a different judge in the same district held that secondary-market purchasers have a reason to expect that their capital contributions would be used to generate profits on their behalf.11
Cumberland Is Not A Dealer
Cumberland argues that the SEC was wrong when classifying the company as an unregistered securities dealer because Cumberland qualifies for the “trader exception.”12 The Securities Exchange Act’s definition of “dealer” excludes persons who buy and sell but not “as part of a regular business.”13 Cumberland argues that the trader exception excludes those who do not “provide advice or services to other investors” but instead act in their own best interest.14 Almost a year ago, the SEC (by a 3-2 vote along party lines) adopted a rule that expanded the definition of dealer with the goal of requiring registration of, among others, principal trading firms. Former SEC Chairman Gary Gensler stated that the rule amendment furthered Congressional intent to ensure “anyone [who] trades in a manner consistent with de facto market making” register as a dealer.15 Cumberland argues that the SEC ignored historical precedent establishing that dealers are those who buy and sell regularly in the service of customers.16 Put simply, Cumberland has no idea from or to whom it is buying or selling, and therefore, the counterparties cannot be considered customers.17
Crypto Industry Is A Major Question That Congress—Not the SEC—Must Address
Next, Cumberland asserts that the “major questions doctrine” requires dismissal of the complaint. Developed over a series of cases, the doctrine explains that courts should not defer to agency interpretations of statutes involving significant economic or political issues unless Congress has clearly authorized the agency to act on those issues.18 Because the Supreme Court explained that the doctrine should be reserved for the most extraordinary questions,19 dismissal of the SEC’s complaint would require a finding that the digital assets industry is of such political and economic significance that Congress would need to delegate specific authority to an agency to regulate it. The district court in SEC v. Coinbase found that the digital asset industry did not have the required significance.20 But Coinbase has appealed to the Second Circuit, arguing that regulating digital asset transactions qualifies as a major question.21 In support of its MTD, Cumberland asserts that the crypto industry, which has a composite value of more than $1.5 trillion (at one point $3 trillion), is highly significant, both economically and politically.22
Cumberland contends that this important issue must be addressed because “the SEC is prosecuting firm after firm for failing to register under Section 15(a) while simultaneously making it impossible to register to trade digital assets, in an apparent attempt to suffocate the digital asset industry.”23 Cumberland argues that, if Congress intended to institute such a consequential policy, it would say so expressly.24 Cumberland also asserts that the SEC is “banning crypto through enforcement” when recent actions confirm there was no Congressional intent to vest the SEC with the sole authority to regulate digital assets, much less ban them.25 A federal judge in California recently sided with the SEC in a case against Payward, Inc. (“Kraken”), finding that the agency’s regulatory authority over digital assets was consistent with Congressional intent and, “while cryptocurrency itself is a relatively novel financial instrument, the principles driving the SEC’s assertions of regulatory authority over cryptocurrency are not new.”26 The court rejected Kraken’s major questions defense noting that while cryptocurrency is a growing financial instrument, it has not yet “risen to a level of economic import that is reasonably comparable to the American energy market, or billions of dollars of outstanding student loan debt.”27
The SEC’s Lack of Guidance Violated Cumberland’s Due Process Rights
Finally, Cumberland claims that the SEC violated its due process rights by (1) refusing to provide guidance on the digital asset transactions it considers securities and Section 15(a)’s registration requirements for purported dealers, and (2) pursuing enforcement based on an application of the Howey test in a manner that departs from its past application of the test to secondary-market transactions of digital assets.28 Cumberland asserts that its parent company purchased a broker-dealer with the goal of trading digital assets, but “the SEC has made it unworkable to register to trade digital assets other than Bitcoin and Ether.”29 Cumberland also contends that the SEC’s complaint should be dismissed as “unjust” because the SEC is seeking to punish them for failing to register.30 The court in Ripple rejected a similar argument, finding that the SEC’s case satisfied due process and was consistent with other SEC digital asset enforcement actions.31
Industry Trend in SEC Enforcement Actions
Cumberland’s arguments are part of a digital asset industry trend of pushing back on the SEC’s enforcement efforts. For example, Coinbase recently sought and received approval from the district court to pursue an interlocutory appeal of an order that would allow the SEC to move forward on claims that Coinbase operated as an unregistered securities exchange, broker, and clearing agency.32 The district court held that “the order presents a clear and controlling question of law: whether transactions involving digital assets of the kind Coinbase intermediates are ‘investment contracts,’ and thus securities, for purposes of the Securities Act.”33 The Second Circuit could provide additional clarity concerning the SEC’s ability to regulate digital assets. As with the Cumberland case, it remains to be seen whether the SEC will continue to press it claims against Coinbase.
In a separate litigation involving the SEC and Coinbase, the Third Circuit ordered the SEC to provide a “more complete explanation” of the reason it denied Coinbase’s request for rulemaking addressing how securities laws apply to digital assets.34 The court found the SEC’s single paragraph explanation—which disagreed with Coinbase’s assertion that application of existing securities statutes and regulations to digital assets is unworkable—to be arbitrary and capricious.35
Although the federal court rejected Kraken’s major question defense, it allowed its fair notice and due process defenses to proceed.36 The court held that the SEC had not shown that an ordinary entity in Kraken’s position “would understand that the Howey test, as applied to the secondary market transactions on Kraken’s platform, establishes that those transactions are investment contracts.”37
Conclusion
Cumberland’s motion to dismiss is representative of the arguments often made in defending SEC enforcement actions, and to date, the SEC has won more often than not. But this point might become moot since the current administration has indicated a friendlier stance towards the digital asset industry.
The SEC’s response to Cumberland’s motion should provide insight into just how favorable a stance the administration is willing to take. A voluntary dismissal and a changed posture by the agency might provide breathing room for the industry while Congress and relevant agencies decide what laws or regulations should apply to digital assets.
1 SEC v. Cumberland DRW LLC, No. 1:24-CV-09842 (N.D. Ill. Oct. 10, 2024).
2 Id.
3 Def’s Mot. Dismiss, SEC v. Cumberland DRW LLC, Dkt. #29, No. 24-CV-09842 (N.D. Ill. Jan. 15, 2025).
4 SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
5 An investment contract as an “investment relationship in which the investor contributes capital to be pooled with that of other investors in a common enterprise, and the developer assumes a commitment to use that capital to generate returns that the investors will share.” Id.
6 Def’s Mot. Dismiss at 2-3.
7 Id. at 3, 22.
8 Mot. Summ. J., SEC v. Ripple Labs, Inc., Dkt. #643, No. 1:20-CV-10832 (S.D.N.Y. Sept. 17, 2022).
9 SEC v. Ripple Labs, Inc., 682 F.Supp.3d 308, 329-30 (S.D.N.Y. July 13, 2023).
10 Appellant’s Brief, SEC v. Ripple Labs, Inc., Dkt. #451, No. 24-2648 (2nd Cir. Jan. 15, 2025).
11 SEC v. Terraform Labs Pte. Ltd., 684 F.Supp.3d 170, 196-98 (S.D.N.Y. July 31, 2023).
12 Def’s Mot. Dismiss at 31.
13 Securities Exchange Act of 1934, 5 U.S.C. § 78c(a)(5) (2018).
14 Def’s Mot. Dismiss at 31.
15 Gary Gensler, Statement on Final Rules Regarding the Further Definition of a Dealer-Trader, SEC (Feb. 6, 2024) https://www.sec.gov/newsroom/speeches-statements/gensler-statement-dealer-trader-020624.
16 Id.
17 Id. at 32.
18 See West Virginia v. EPA, 597 U.S. 697 (2022).
19 Id. at 721.
20 SEC v. Coinbase, Inc., 736 F.Supp.3d 260, 283 (S.D.N.Y. Mar. 27, 2024).
21 Appeal Petition, Petition at 12, SEC v. Coinbase, Inc., No. 123-CV-4738 (2d Cir. 2025).
22 Def’s Mot. Dismiss at 35.
23 Id. at 3
24 Id.
25 Id. at 37-38.
26 SEC v. Payward, Inc.(“Kraken”), No. 23-cv-06003, 7-8 (N.D. Cal. Jan. 24, 2025).
27 Id.
28 Def’s Mot. Dismiss at 38.
29 Id. at 1, n.1.
30 Id. at 40.
31 Ripple, 682 F.Supp.3d at 332.
32 Coinbase, No. 23-CV-4738 (S.D.N.Y. Jan. 7, 2025).
33 Id. at 12-13 (S.D.N.Y. Jan. 7, 2025).
34 Coinbase, Inc. v. SEC, Dkt. #60, No. 23-3202, 5, 14 (3rd Cir. 2025).
35 Id.
36 Kraken, No. 23-cv-06003 at 10.
37 Id.
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