In the first few months of 2024, the Securities and Exchange Commission (“SEC”) launched multiple major offensives against a broad array of cryptocurrency companies. However, in a new phase of what has been described as a “bitter war” between the crypto industry and the SEC, crypto companies have shifted from defense to offense. Following on the heels of several high-value judgments against their industry, several companies have banded together to bring test cases challenging federal crypto regulation and enforcement. As the executive branch braces for the fallout from the Supreme Court’s decision in Relentless v. Department of Commerce, which may end a 40-year regime of judicial deference to agency expertise, it remains to be seen whether the SEC and other agencies will have the tools to restrain crypto’s often predatory excesses.

Coming after Crypto

Since its inception a little over a decade ago, the cryptocurrency industry has exploded on the global stage, bestowing extreme wealth upon some while dealing financially fatal blows to others. Financial losses in crypto frequently have stemmed from sweeping fraud in this largely unregulated industry. The Federal Trade Commission registered reports from more than 46,000 people of losses totaling more than $1 billion in crypto scams between January 2021 and June 2022, but the number of people impacted is likely much higher, as the FTC records only individuals who affirmatively reached out to authorities. The Better Business Bureau named crypto and investment fraud as the riskiest type of scam for consumers in 2023.

However, as KBK’s Alexis Ronickher and Nicolas O’Connor explained in their February 2022 piece, Heightened Eye on Cryptocurrency Industry Could Boost Whistleblowing, federal regulators have begun subjecting the crypto industry to increased scrutiny, seeking major judgments against bad actors and attempting to force these companies into existing regulatory frameworks.

On January 29, 2024, the SEC filed a complaint against founders of Hyperfund (also known as HyperTech, HyperCapital, HyperVerse, and HyperNation) for running a scheme that robbed investors of $1.7 billion. Sec. and Exch. Comm’n v. Lee, et al., 1:24-cv-00296-RDB (D. Md. Jan. 29, 2024). While the company traded in cryptocurrency, the SEC argued that their fraud closely mirrored a traditional Ponzi or pyramid scheme. Though Hyperfund promised investors fast, high returns based on an alleged large-scale bitcoin mining operation, the company used new investors to pay old investors without launching any stand-alone revenue stream. In 2022, the company collapsed, and investors could make no more withdrawals. The same week the SEC filed its complaint, the U.S. Attorney’s Office for the District of Maryland announced related criminal charges against the founders. United States v. Lee, Docket No.: 24-CR-21 (D. Md. Jan. 25, 2024).

Then, on March 14, 2024, the SEC charged 17 leaders of CryptoFX in a similar crypto Ponzi scheme, that raised $300 million. This scheme targeted more than 40,000 investors primarily from Latino communities in the United States and two other countries. The scheme’s founders promised “guaranteed” and “risk free” investments.

These cases follow on the heels of even higher-value frauds, including the OneCoin scam (estimated $25 billion in losses), the BitConnect scam (approximately $4 billion in losses), and the Bitclub Network scam (up to $722 million in losses). Former FTX Trading Ltd. (“FTX”) CEO Samuel Bankman-Fried was recently sentenced to 25 years in prison for fraud and related crimes that led to crypto customer losses of more than $8 billion.

The Future of Enforcement

The SEC shows no sign of slowing down. Statements by agency leadership demonstrate their commitment to gaining control of the crypto industry by subjecting those companies to the same rules applied to other financial investment companies. On bringing the HyperFund enforcement action, the Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, stated: “This case illustrates yet again how noncompliance in the crypto space facilitates schemes where promoters capitalize on the promise of easy money, without providing the detailed investor protection disclosures required by the registration provisions of the federal securities laws.” SEC Chairman Gary Gensler echoed this sentiment in his bid for increased funds for crypto regulation, explaining, “There has been a dynamic change in communications to and among investors, from Reddit forums to celebrity influencers. Further, we’ve seen the Wild West of the crypto markets, rife with noncompliance, where investors have put hard-earned assets at risk in a highly speculative asset class.”

Part of the SEC’s strategy for controlling crypto is using existing securities laws for crypto transactions. Recently, the SEC has gone after ether (ETH), the native cryptocurrency of the Ethereum network, working to classify ETH as a security. The ETH probe follows multiple similar lawsuits against domestic and international crypto exchanges, including Coinbase, Kraken and Binance. But crypto companies are not submitting to the pressure. Instead, the industry has launched a legal attack on not just the regulators’ actions against them, but also on the method by which the regulators set their rules. Coinbase, a publicly-traded cryptocurrency exchange platform, has taken this fight to the Third Circuit. After the SEC declined the company’s formal petition to create special rules regulating crypto companies, Coinbase argued that the agency’s answer failed to adequately explain its reasoning, amounting to arbitrary and capricious decision-making. Coinbase claimed that the existing SEC regulations do not fit the crypto industry, and therefore the agency cannot assert authority over crypto assets without new regulations. Crypto allies filed amicus briefs in the case, calling the agency’s existing processes “incoherent” for the industry.

Other crypto advocates are joining the offensive. On March 25, 2024, the DeFi Education Fund (DEF) filed suit in Texas against the SEC claiming that Beba, an apparel company, that airdropped crypto tokens to customers for free during a promotional event, should not be subject to federal securities laws. This suit demonstrates how aggressively the crypto industry and its allies are approaching this fight. The SEC had pursued no action against Beba before DEF filed its Declaratory Judgment action in court. Instead, the suit seeks to shield the company and others that market digital assets from any law enforcement actions might be contemplated in the future.

These strategies attacking the authority of the SEC to regulate crypto may soon be abetted by the likely decision in Relentless, Inc. v. Department of Commerce, which legal scholars warn could spell the end of administrative agencies’ current enforcement powers. While crypto companies’ practices have captured the attention of regulators, these federal enforcement mechanisms can only work if the agencies have the authority to enforce securities laws against the crypto industry. Crypto companies are aware of the precarity of the administrative state, and they are already pursuing creative legal strategies to challenge federal enforcement efforts. The Supreme Court’s decision in Relentless may change the terrain on which this crypto war will be fought, leaving the question of whether existing laws apply to crypto first to the courts, and if they say no, then to Congress to draft new legislation to fill the gap.