FTX Case May Bring SEC One Step Closer To Banning Crypto Exchanges

FTX Case May Bring SEC One Step Closer To Banning Crypto Exchanges

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The Securities and Exchange Commission (SEC) appears to be compiling legal ammunition to take on the beating heart of the global crypto economy: centralized crypto exchanges. And the agency’s unfolding case against FTX reveals arguments that could further that strategy.

On Wednesday, the SEC announced charges against two key allies of disgraced FTX founder Sam Bankman-Fried: Caroline Ellison, former CEO of FTX’s affiliate trading firm Alameda Research, and Gary Wang, an FTX co-founder. In addition to revealing that Ellison and Wang flipped on Bankman-Fried and are now fully cooperating with federal authorities, the complaint divulged that the SEC—in its pursuit of securities fraud charges pertaining to FTX’s sale of its native token FTT—appears to be escalating its assault on crypto assets as a whole.

If so, it's consistent with the agency’s recent, successful suit against blockchain-based content sharing platform LBRY.

It’s no surprise that the SEC charged Ellison and Wang with securities fraud for manipulating the price of FTT, and for offering FTT as an unregistered security. That action follows a plethora of past moves taken by the securities regulator. But the complaint’s language regarding FTT went notably further.

Wednesday’s complaint labeled FTT “an illiquid crypto asset security,” making the subtle—but crucial—point that the SEC views FTT as a security in itself, regardless of the manner in which it was offered or sold. SEC chair Gary Gensler doubled down on that view yesterday while announcing the charges against Ellison and Wang, calling FTT “an exchange crypto security token that was integral to FTX.”

While seemingly semantic, the difference between pursuing an action against a company for offering an asset as a security, and labeling an asset inherently a security in all contexts, marks a shift in the SEC’s decades-long approach to security regulation. The change could mean a potentially substantial escalation in the agency’s efforts to regulate the crypto industry.

If the SEC can get courts to agree that crypto tokens like FTT are securities regardless of how they are offered, the agency would be able to go after more than just the projects that create those tokens. The SEC could target any intermediary that sells those tokens in any context. In such a scenario, major crypto exchanges like Coinbase, Kraken, and Binance would be exposed to immense legal liability, and either permitted to participate in crypto-wary registered exchanges like the New York Stock Exchange, or shut down.

Coinbase Is Backing Ripple Against the SEC

Last month, the SEC defeated blockchain-based publishing platform LBRY in federal court, and got a judge to imply in his ruling that LBRY’s native token LBC could be considered a security.

“What the LBRY decision does is provide a major step forward in the SEC’s quest to label all tokens as securities, and that is indeed a very, very significant thing,” Lewis Cohen, an attorney specializing in crypto and securities regulation, told Decrypt at the time. (Cohen has previously represented Decrypt.)

“The SEC has changed gears,” Cohen said. “Instead of going after projects, they want to go after the marketplaces and intermediaries.”

LBRY Says Company Has Been 'Killed by Legal and SEC Debts'

The SEC’s victory against LBRY, though, occurred in the U.S. District Court for the District of New Hampshire, a jurisdiction without major sway on federal jurisprudence. The SEC’s current case against FTX, meanwhile, is set in the U.S. District Court for the Southern District of New York, the Manhattan-based overseer of Wall Street activity so central to federal finance law that it is regularly referred to as the “Mother Court” by legal professionals.

Prior to FTX’s stunning collapse last month, the next hurdle in the SEC’s apparent quest to take on crypto exchanges looked to be winning its prominent, ongoing case against blockchain payments company Ripple Labs. Experts pondered whether the federal agency would be able to get a judge from the Southern District of New York in that case to label Ripple’s XRP token an inherent security.

There will be no such anticipation hanging over the SEC’s case against FTX; Ellison and Wang have already pled guilty to all charges.