Ex-SEC Lawyers Agree: Crypto Enforcement Shackles May Take Time to Resolve

After
years
of
legal
wrangling
with
the
U.S.
securities
regulator,
President-elect
Donald
Trump’s
win
was
taken
by
the
crypto
industry
as
a
definitive
sign
that
their
courtroom
fights
and
enforcement
pressures
would
be
cast
away
when
he
takes
the
oath
of
office
again.

But
shedding
the
enforcement
legacy
of
Securities
and
Exchange
Commission
Chair
Gary
Gensler
is
not
quite
that
simple,
according
to
former
agency
officials
and
lawyers
interviewed
by
CoinDesk,
some
of
whom
now
represent
crypto
clients.

While
an
incoming
chairman
appointed
by
Trump,
a
recent
crypto
convert,
could
effectively
clear
the
decks
of
future
enforcement
actions,
dealing
with
the
many
cases
already
being
litigated
is
a
stickier
prospect.
Turning
the
SEC
ship
could
take
several
months
into
2025
—
maybe
longer.
And
even
then,
the
lawyers
say,
dramatic
case
dismissals
might
not
even
happen.

What
may
be
the

most
prominent
of
those
outstanding
federal
cases
is
the
SEC’s
battle
with
Ripple
Labs,
representing
the
first
big
dispute
in
which
the
agency
accused
the
company
of
acting
as
a
securities
exchange
without
registering.
The
chairman
then
was
Jay
Clayton,
not
the
industry-loathed
Gensler.
And
the
president
who
appointed
him?
Donald
Trump.

“The
reality
is
that
the
SEC’s
current
approach
to
crypto
really
began
under
the
last
administration,”
said

Ladan
Stewart,
a
partner
at
White
&
Case
who
was
a
top
enforcement
lawyer
at
the
SEC
and
led
some
of
its
big
crypto
cases.

“Gensler
gets
a
lot
of
heat
in
the
press
about
the
Ripple
case,
but
that
case
was
actually
brought
in
the
waning
days
of
the
Clayton
SEC,”
Stewart
said.
“In
many
ways,
the
SEC
approach
to
crypto
under
Gensler
is
just
a
continuation
of
what
the
Clayton
approach
was.”

Read
More:



Gary
Gensler’s
Contentious
Reign
Over
Crypto
Approaches
Its
Twilight

The
agency
will
now
have
some
questions
to
answer
anew:
Does
the
legal
standard
known
as
the
Howey
test
properly
account
for
crypto
tokens
as
securities
or
not?
Do
crypto
securities
keep
the
securities
label
when
they’re
traded
on
secondary
markets,
such
as
Coinbase
Inc.?
Will
the
SEC
fall
back
on
Howey
to
police
bad
behavior
in
the
crypto
markets
that
would
remain
out
of
its
reach
if
it
doesn’t
pin
its
securities
tag
on
the
involved
assets?

On
the
first
question,
the
agency
has
—
since
Clayton
—
viewed
the
basic
business
model
of
crypto
platforms
as
a
violation
of
securities
law.
Many
tokens
are
securities,
the
agency
has
found,
and
they
can’t
be
legally
traded
if
the
exchange
isn’t
registered.
That’s
at
the
heart
of
the
Ripple
case
and
the
enforcement
action
against
Coinbase
(COIN).
Unlike
the
SEC’s
more
familiar
Wall
Street
cases
that
usually
don’t
pose
make-or-break
threats
to
the
involved
companies,
this
core
question
decides
whether
the
most
prominent
crypto
exchanges
can
move
forward
in
the
U.S.
or
not.

“When
I
arrived
in
2021,
the
commission
under
Chairman
Jay
Clayton
had
already
brought
some
80
actions,
including

the
Ripple
case,
against
participants
in
the
crypto
markets
that
were
not
following
the
common-sense
rules
of
the
road,”
Gensler
said
in
a
Thursday
speech
to
the
Practising
Law
Institute,
noting
that
on
his
watch
the
agency
“has
continued
that
vigilance.”

The
agency,
which
didn’t
respond
to
a
request
for
comment
on
its
current
legal
strategy,
has
put
the
weight
of
its
crypto
position
on
a
U.S.
Supreme
Court
ruling
known
as
Howey,
which
defines
what
makes
an
asset
a
security.
So
far,
the
agency
has
had
a
mixed
record
of
crypto
decisions
in
the
frontline
federal
courts.

All
of
its
cases
asserted
“very
strong
claims
of
violation
of
law,”
noted
Patrick
Daugherty,
a
former
SEC
lawyer
who
now
represents
crypto
clients
at
Foley
&
Lardner
in
Chicago.
The
agency
likely
needs
to
go
back
and
take
a
close
look
at
them
one-by-one,
he
said,
and
“each
one
has
to
be
determined
on
its
own
merits.”

If
nothing
had
changed,
the
cases
would
likely
have
landed
in
the
Supreme
Court’s
lap.
But
the
return
of
Trump
—
the
self-declared
“crypto
president”
—
will
produce
a
new
Republican
leadership
at
the
agency
that
is
probably
going
to
look
more
favorably
on
each
of
the
major
crypto
cases.

“In
the
most
extreme
case,
they
could
simply
dismiss,”
Daugherty
said.
But
dumping
the
cases
abruptly
is
“a
big
ask
and
might
not
be
justified.”

The
alternative
could
be
structured
settlements
in
which
crypto
firms
don’t
admit
wrongdoing
but
agree
to
stay
inside
whatever
guardrails
the
agency
sets
down.

“Those
things
take
a
little
bit
of
time
to
put
together
and
do
correctly,”
Daugherty
said.

“I
do
think
that
it
would
be
foolish
to
expect
any
significant
change
on
the
very
first
day,”
said
Paul
Grewal,
the
chief
legal
officer
for
Coinbase,
who
has
led
the
company’s
fight
with
the
SEC.
But
he
told
CoinDesk
he
does
expect
Trump’s
team
to
move
swiftly,
despite
the
messy
track
record
of
his
first
term
in
the
White
House.
“I
will
gently
disagree
with
those
who
suggest
that
this
will
take
forever.”

Grewal’s
first
choice
is
complete
dismissal,
but
he
suggested
he’s
open
to
discussion.

On
all
the
crypto
cases,
Anne
Kelley,
a
longtime
former
SEC
official
who
is
now
at
Mercury
Strategies,
agreed
that
“the
SEC
could
vote
to
stop
litigating
or
to
settle
—
maybe
on
the
cheap,”
she
told
CoinDesk.
“But
that
decision
can’t
be
made
unilaterally
by
a
chairman.
It
needs
to
be
voted
on
by
the
commission.”

The
problem
for
all
of
the
major
decisions
—
dismissals,
settlements
and
enforcement
actions
—
is
that
they
can’t
be
handled
only
by
a
new
chairman
and
the
senior
legal
staff
he
or
she
brings
in.

At
the
federal
appellate
court
level,
for
instance,
the
agency’s
general
counsel
supervises
those
matters,
according
to
Tom
Krysa,
another
former
SEC
enforcement
lawyer
who
also
works
at
Foley
&
Lardner
in
Denver.
While
that
office
may
be
able
to
pursue
a
stay
(a
formal
delay)
under
the
close
watch
of
the
chair’s
office,
it
would
need
the
commission’s
majority
approval
to
withdraw
an
appeal
entirely.

If
Trump
promotes
Republican
SEC
Commissioner
Mark
Uyeda
to
be
acting
chairman
of
the
agency
in
January,
as
is
widely
expected,
Uyeda
would
still
only
have
one
other
Republican
on
the
five-member
commission
for
a
time.
Even
if
Gensler
chooses
to
leave
the
agency
entirely
after
his
chairmanship,
rather
than
stay
to
finish
his
term
as
a
commissioner
that
ends
in
June
of
2026,
there
are
still
two
other
Democrats
there
who
can
stand
in
the
way
of
a
pro-crypto
shift.

While
Commissioner
Caroline
Crenshaw’s
term
expired
in
June,
she’s
entitled
to
stay
on
until
the
end
of
2025
or
until
she’s
replaced
by
a
candidate
who
survives
what
can
sometimes
be
a
months-long
confirmation
process
conducted
by
the
U.S.
Senate.

In
the
nearer
term,
what
the
agency
can
quickly
change
is
how
it’s
handling
cases
that
haven’t
yet
been
brought
or
investigations
still
short
of
their
conclusions.

Stewart’s
guess
for
the
immediate
future:
“We’re
not
going
to
see
registration-only
cases”
like
the
ones
that
have
plagued
several
prominent
crypto
firms.

Coinbase’s
Grewal
said
he
assumes
the
new
SEC
will
quickly
begin
conducting
“a
careful
separation
of
those
cases
that
focus
on
fraud
or
scams”
from
the
ones
that
are
more
technical
in
nature
“but
haven’t
resulted
in
any
consumer
harm
whatsoever,”
such
as
the
registration
complaint
against
his
company.

For
his
part,
Commission
Uyeda
has
said
he

favors
a
halt
in
new
actions
against
crypto
firms
for
registration
violations
while
the
regulator
figures
out
that
process.

“We
need
to
lay
out
some
clear
guidance
and
interpretations
on
what
exactly
falls
within
and
falls
outside
of
the
securities
laws,”
Uyeda
was
reported
as
saying.

John
Reed
Stark,
a
former
SEC
chief
of
the
office
of
internet
enforcement,
said
in
a

live
session
on
X
earlier
this
month
that
the
crypto
industry’s
weight
has
been
felt
and
it’ll
probably
get
a
very
friendly
SEC
leadership.
The
eventual
new
enforcement
director
will
be
“the
most
important
of
all
the
positions
that
the
chair
will
pick,”
he
said,
and
they’ll
look
at
all
the
crypto
cases
—
investigations
and
litigation
—
and
likely
direct
all
the
resources
to
the
“cases
that
involve
egregious
fraud”
and
pull
the
plug
on
those
that
don’t.
So
crypto
enforcement
wouldn’t
stop
entirely,
but
its
nature
could
shift.

“It’ll
be
a
very
important
transition;
a
lot
of
money
is
at
stake
in
these
cases,”
Daugherty
said.
More
than
that,
he
said,
“the
industry’s
future
is
largely
at
stake
in
the
United
States.”