Possible Lawsuit Could Hit American Crypto Exchanges
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America’s top investment fraud lawyer and longtime securities attorney, Tom Grady, is preparing for possible legal action against the biggest cryptocurrency exchanges in the country, including Coinbase, Robinhood, Kraken, and others.
Crackdown on Crypto Exchanges
There has been news of the SEC cracking down on major crypto exchanges lately, and another possible lawsuit may hit these crypto exchanges.
Securities lawyer Grady stated that he had opened an investigation into the operations of the exchanges. He hopes to find any possible violations of state and federal securities laws by the exchanges’ dealings in digital coins, the vast majority of which are considered unregistered securities by the SEC and thus operate against federal law.
Grady claims that the exchanges may have deceived investors by failing to properly disclose the risks associated with trading and holding unregistered cryptocurrency.
Grady thinks that because the great majority of crypto tokens are unregistered securities, the exchanges are breaking both state and federal securities laws by marketing them to customers as investments.
Therefore, he is searching for customers of Coinbase, Robinhood, and other exchanges who suffered losses when buying cryptocurrencies on their platforms to submit information about their investments.
There haven’t been many class action cases involving cryptocurrency because most retail investors think digital assets do not qualify as securities but rather are currencies like the dollar. However, if the classification discussion in Washington continues, Grady’s probable legal action may pave the way for other lawsuits against crypto companies.
Since the U.S. Securities and Exchange Commission (SEC) began taking enforcement actions against several crypto businesses for selling unregistered securities in 2017, the controversy over how digital assets are classified has rattled the crypto industry.
The SEC believes the majority of digital coins are for purely speculative purposes or illegal activities. This includes activities such as the sale of illegal drugs and money laundering.
The SEC applies what is known as the “Howey Test,” which is named after a 1946 Supreme Court case that determines whether investment contracts must be registered with the SEC to assess if a cryptocurrency is actually an unregistered securities.
This also led to the SEC filing charges against officials of the digital cross-border payment startup Ripple in 2020 for the sale of the XRP coin, which was used to fund the platform’s development.
However, with the demise of the crypto exchange FTX last year, regulators increased their pressure. The SEC also filed a lawsuit against the crypto exchanges Gemini and Kraken last month.
The San Francisco-based bitcoin exchange Kraken was fined $30 million for breaking securities rules.
Today we charged Kraken with failing to register the offer and sale of their crypto asset staking-as-a-service program, whereby investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent.
— U.S. Securities and Exchange Commission (@SECGov) February 9, 2023
Like Grady, Gary Gensler, the chair of the SEC, wants to take action against all coins and tokens that he deems unregistered securities.
Pushback on SEC OverBearing Rules
The U.S. Securities and Exchange Commission is out to clamp down on several crypto exchanges. However, a small consumer advocacy group for cryptocurrencies is starting a campaign against the government body.
According to the group named the Digital Currency Trader’s Alliance (DCTA), they believe retail crypto investors are being disproportionately harmed.
Therefore, it has launched an online advertising campaign urging them to contact their congressional representatives and urge them to oppose SEC Chairman Gary Gensler’s regulation through an enforcement strategy.
The “Stop the SEC” movement aims to support small-scale investors in their demands for regulatory clarification from Congress and relief from SEC overreach.
Legally, the SEC lacks clear authority to regulate cryptocurrencies since Congress or the courts have not formally designated digital assets as securities.
It is predicted that the ongoing legal dispute between the SEC and the blockchain technology company Ripple, which is likely to be resolved later this year, will provide a precedent for the SEC’s power over digital coin offers.
Although Congress is drafting regulations, the DCTA wants to utilize its campaign against the SEC as a launchpad to enlist small-scale investors in the legislative process early on.
