In a string of stunning reversals, the SEC is apparently dropping its cases against Coinbase and Robinhood Crypto, and is replacing its Crypto Assets Enforcement Unit with a “Cyber and Emerging Technologies Unit.” First, Coinbase announced Thursday, February 20, that it reached an agreement-in-principle to dismiss the SEC’s long-running enforcement action. Second, that same day, the SEC abruptly replaced its Crypto Assets and Cyber Enforcement Unit with a “Cyber and Emerging Technologies Unit” that will focus more on fraud and facilitating capital formation than the failure to register with the SEC. Third, on February 21, the SEC notified Robinhood that the agency would be dropping its investigation into Robinhood’s crypto business. These developments signal the current administration’s sharp break away from former SEC Chair Gary Gensler’s aggressive pursuit of crypto enforcement actions that stretched the limits of the SEC’s legal authority.
First, Coinbase followed its announcement that the SEC would drop its case with a blog post, calling the decision a victory for “the United States, and individual freedom.”[1] Coinbase CEO Brian Armstrong took to social media, saying that had Coinbase complied with the SEC’s initial demands, it would have “dramatically limited the scope of which crypto assets were allowed in the U.S. and pushed the industry further offshore, into the shadows.”[2] Armstrong also emphasized the need for crypto legislation and clear rules for the industry, stating that it will help build the industry in the United States.
As Armstrong’s comments demonstrate, the dismissal is welcome news to the crypto-exchange community. But it moots an opportunity to clarify the question of which types of crypto assets are investment contracts under the federal securities laws. In a prior article, we discussed the Coinbase trial Court’s ruling, which took a broad “holistic” view of the question, and permitted the SEC’s case to proceed against several tokens. That decision was set for appellate review, which would have pitted the Coinbase decision and others against Ripple Labs, which found that the sale of tokens to retail investors on a secondary exchange did not constitute an “investment contract.” That question will have to wait for another case.
Second, the upcoming Coinbase dismissal is part of a broader SEC reversal of its prior approach towards crypto enforcement. On the same day as the Coinbase announcement, the SEC announced that it is replacing its vaunted Crypto Assets and Cyber Enforcement Unit with a dramatically different Cyber and Emerging Technologies Unit. The new unit will be significantly smaller than the former, shrinking from 50 members to 30. More importantly, the SEC’s new Unit will have a much narrower enforcement focus on fraud-based actions, and a pro-business focus on “facilitat[ing] capital formation and market efficiency by clearing the way for innovation to grow.”[3]
Instead of high-profile cases attacking crypto exchanges and issuers for failing to conduct an offering or register with the SEC, the new Unit will focus enforcement efforts on fraud against retail clients, hacking-related insider trading, brokerage account takeovers, and other schemes involving emerging technologies. According to SEC Acting Chairman Mark Uyeda, “The unit will not only protect investors but will also facilitate capital formation and market efficiency by clearing the way for innovation to grow. It will root out those seeking to misuse innovation to harm investors and diminish confidence in new technologies.”[4]
This announcement marks a shift away from (i) using SEC Enforcement Actions to retroactively regulate crypto assets by imposing fines and penalties, and toward (ii) giving the industry advance notice of legal changes through policy recommendations from a new “Crypto Task Force.” This new Task Force will “seek[] to provide clarity on the application of the federal securities laws to the crypto asset market and to recommend practical policy measures that aim to foster innovation and protect investors.”[5]
Similarly, the SEC recently reassigned its top crypto assets litigator, and key figure in the former Crypto Assets and Cyber Enforcement Unit, to the Office of Information and Technology.
Third, Robinhood has announced that it received a letter on February 21 from the SEC that the agency is dropping its investigation into Robinhood’s crypto arm.[6] The SEC Staff had previously sent Robinhood a Wells Notice stating that it recommended charges against Robinhood for failing to register its (i) offerings of digital assets and (ii) lending and staking products. This is another dramatic reversal of a high-profile investigation.
The SEC’s shift in Crypto enforcement will have significant ramifications for the industry. With the dismantling of the Crypto Assets and Cyber Unit and a greater focus on policymaking rather than litigation, Crypto and Digital Asset firms may now face fewer immediate enforcement actions, creating a more favorable environment for innovation and business expansion. For exchanges like Coinbase, this change could provide greater flexibility to list digital assets without the heightened SEC scrutiny that characterized the Gensler years.
Sadis & Goldberg has a dedicated practice focused on Digital Assets and Blockchain Technology. We are available to discuss all digital asset and blockchain litigation matters, investments, or fund formation. If you have any questions about this article or any other digital assets issue, please contact Douglas Hirsch (dhirsch@sadis.com), Sam Lieberman (slieberman@sadis.com), Frank Restagno (frestagno@sadis.com), James Ancone (jancone@sadis.com), or Scott Ferrier (sferrier@sadis.com).
