Despite some losses, the SEC continues to fight crypto

When Gary Gensler took office as chairman of the U.S. Securities and Exchange Commission in 2021, he made no bones about his intent in waging war against “decentralism theater.” Although some predicted the former banker — who once taught a course on blockchain at MIT — would go easier on the industry than his predecessor , it quickly became clear Gensler viewed crypto as a charade.

Throughout his tenure as the regulator’s chief, Gensler’s agency has filed countless lawsuits against crypto industry participants, including some of the largest like Coinbase, Binance and Terraform Labs. And while the SEC has won several crypto-related lawsuits (or, more often, settled), Gensler’s larger working theory that nearly every token outside of bitcoin falls under his purview is falling flat. The agency’s court losses and failed investigations are stacking up.

Just Thursday, for instance, the agency dropped its investigation into the Paxos-issued, Binance-branded BUSD stablecoin.

"The idea that a stablecoin is itself a security is ridiculous. And Judge Jackson confirmed that BUSD specifically is not a security in the SEC case against Binance. So it makes sense that the SEC would drop the case against Paxos, which would have been another loser for them," MetaManLaw lawyer James Murphy told The Block.

Here’s a quick rundown of some of the top securities cop’s most notable losses.

Bitcoin ETFs

To be fair, the SEC had been adamantly opposed to approving spot bitcoin exchange-traded funds ever since the Winklevoss twins made the first attempt to launch one in 2013. But a decade later, this January, the agency was forced by a Washington D.C. appeals court to approve these funds due to its “arbitrary and capricious” attempt to stymie the conversion of the Grayscale Bitcoin Trust into an ETF.

As of July 9, spot bitcoin ETFs have accumulated net inflows of $15.27 billion since going live. And the agency is well on the way to approving ETFs for Ethereum ETH -3.80% ’s native token.

Ripple, XRP and Securities Law

Again, the SEC’s legal battle against Ripple Labs technically predates Gensler’s ascension (the case was filed at the tail end of former SEC lead Jay Clayton’s chairmanship). However, almost all of the casework — and, more importantly, the verdict — was done under Gensler’s leadership.

District Judge Analisa Torres ruled that while Ripple’s institutional sales of XRP to firms like hedge funds and exchanges constituted an unregistered securities offering, secondary sales (aka “programmatic sales”) did not. In other words, contra to Gensler’s position that “most crypto tokens are securities,” Judge Torres ruled that digital assets themselves do not necessarily violate federal securities laws.

“Certainly [the SEC is] losing the fight to create ‘crypto asset securities’ out of thin air, as courts are slapping them down and they are ending investigations. I think they will still fight, but they are losing ground,” Columbia Business School associate professor Austin Campbell told The Block.

Staff Accounting Bulletin 121

The relatively arcane accounting rule SAB121 became the center of focus in Congress for a brief period earlier this year after both the House and Senate voted to repeal the SEC's staff accounting bulletin. Although representatives failed to reach the threshold to block President Joe Biden’s veto of the measure, the political fight is considered something of a black eye for the SEC.

Last year, the Government Accountability Office found that the independent Government Accountability Office said the SEC inappropriately imposed the guidance, which should have first been presented to Congress. The rule was also widely opposed by banking industry interests because it imposed strict capital requirements on any financial firm looking to custody cryptocurrencies.

D.E.B.T. Box

The SEC’s lawsuit against crypto startup D.E.B.T. Box likely would have been a run-of-the-mill, largely unnoticed legal matter had the agency not perjured itself in court. In a March filing, Utah District Court Judge Robert Shelby chastised the agency, saying the case was “marred by false statements and misrepresentations” after the agency wrongfully attempted to freeze the company’s assets.

In May, Judge Shelby ordered the SEC to pay about $1.8 million to cover D.E.B.T. Box's legal fees. The two SEC agents pursuing the case resigned, the SEC moved to dismiss the case and the agency’s Salt Lake Regional Office in Utah was shuttered.

SEC's Recent Wins and Potential Future Risks

With all this said, the SEC has notched several recent wins that could ultimately set policy in its favor. It’s worth pointing out that many of the SEC’s winning enforcement actions go unnoticed, often because they are against small firms or earn the agency small returns. This is to say little of the $4.5 billion settlement Terraform Labs and Do Kwon agreed to pay.

Since the beginning of this year, for instance, the SEC has successfully settled three crypto-related cases, including allegedly fraudulent Rockwell Capital Management, decentralized exchange ShapeShift and brokerage TradeStation . In March, the agency also charged 17 individuals for their roles in a $300 million Ponzi scheme after halting it in 2022.

Moreover, while the SEC has gotten routed in court, it has notched several recent wins that could ultimately set policy in its favor. For instance, crypto exchange Coinbase attempted to throw out all three of the SEC’s charges but largely failed. Judge Faila dismissed an accusation against Coinbase Wallet but allowed the SEC to sue over its staking program. She also “agreed initial offerings could involve a securities offering,” Campbell said.

A similar situation occurred in the SEC’s case against Binance, which also failed to convince the court to throw out the case.

“The SEC still seems to be aggressively going after various crypto-related cases, and it stands to reason to me that not every investigation would result in enforcement action,” said Molly White, author of the crypto-critical Web3IsGoingGreat and Citation Needed blogs, referring to the dropped BUSD investigation.

It was a point echoed by pseudonymous critic Bitfinex’d , who said expecting the SEC to win every case is like expecting “traffic cops to shutdown gang warfare.”

"The problem with 'winning' against the SEC is that there is still a high cost. Plus it takes away from companies being able to work on more valuable efforts. In that way, the process becomes the punishment," Javelin Strategy and Research co-head of payments James Wester said.

If anything, the SEC has become more aggressive against the crypto industry over the years, choosing to go after the biggest and most symbolic companies like Coinbase, Uniswap and Consensys. It relentlessly pursues actions that send the message that no corner of crypto is safe.

And while crypto may win occasionally, it may be a losing game — at least for now. All that may change should a new administration take the White House in 2025.