The Securities and Exchange Commission’s (SEC) track record in crypto enforcement actions had once been daunting, but cracks are showing. “For the longest time, the SEC was touting its 100% success rate,” says Anthony Tu-Sekine, a securities lawyer for Seward & Kissel.

But a recent spate of unfavorable decisions has many looking more closely at the agency’s actions and what it’s up against.

“Judicial sentiment among courts who have heard these cases has thus far gone in favor of those challenging the SEC,” says Ashley Ebersole, general counsel at 0x. “It puts the SEC on their heels in terms of not just having courts bless their entire approach to this sector.”

The Latest Rulings

What Tu-Sekine and Ebersole were alluding to is a trio of recent legal setbacks for the agency.

One was a decision in a class action suit against Uniswap that earlier this week took to task many of the SEC’s underlying arguments regarding the nature of cryptocurrencies. 

“The Court declines to stretch the federal securities laws to cover the conduct alleged, and concludes that Plaintiffs’ concerns are better addressed to Congress than to this Court,” the decision reads, alongside repeated references to the law being in development or “a gray area.”

It’s a non-binding decision, meaning courts can depart from it. But it forms a legal vocabulary that other lawyers from across the country can pull from.

It was a case in which the SEC wasn’t even a party, but it remained a rebuke to the agency, whose investigation into Uniswap the judge referenced by name.

“[The judge] is not just going to take [the SEC’s] word for it,” says Tu-Sekine. He noted the situation looked better for crypto companies, “rather than seeing the courts look at the SEC’s argument, rubber stamping it and saying ‘well if the SEC says it, that’s good,’” 

The agency had also seen recent judicial setbacks in cases with Grayscale over its application to convert its Bitcoin trust into an ETF, and Ripple over its issuance of XRP.

Despite some overexuberant responses from a crypto industry otherwise mired in a bear market, none of these decisions are in and of themselves earth-shaking. But they certainly matter.

“I think the SEC needs to reconsider its strategy,” says Rohan Grey, an associate professor at Willamette University’s College of Law and a prominent critic of the crypto industry. He sees the recent rulings as evidence that the SEC has overplayed its hand as a regulator.

“Part of the pitch of ‘we can do this alone’ was ‘we can actually do it,’” says Grey, lamenting that the SEC fought hard to keep banking regulators such as the OCC and FDIC from taking action instead.

There are a number of cases remaining on the SEC’s docket that loom large. We look more closely at them now.

The Ripple Appeal

Ripple won a partial victory in an ongoing case that Gensler’s predecessor, Jay Clayton, put out as a parting shot in the twilight of his tenure at the SEC. That case is, however, very much still ongoing.

“Ripple is not over. It’s not close to over, and it’s been close to two-and-a-half years, and it involves one token,” says Phil Moustakis, a partner at Seward & Kissel and an enforcement attorney for the SEC during many of its earliest Bitcoin cases.

The case is the single most momentous of the Clayton-era stamp-out of initial coin offerings, or ICOs, the largest litigation project he undertook in the crypto realm during his tenure.

Issuers largely did not register ICOs as securities offerings, until eventually many started conducting their early offerings under SEC exemptions. Ripple and XRP came out before this era, but the SEC argues that XRP was always basically a way for Ripple to fund its business operations while avoiding the disclosures that traditional stocks or bond entail.

It’s been a brawl.

The most significant element of the recent victory was the decision that sales of XRP directly from Ripple to investors was a securities offering, but sales of XRP on secondary exchanges was not.

The SEC is already in the process of appealing that particular decision to the circuit court — a process contingent on the circuit court deciding to take up such an appeal.

It’s a gamble. Any decision at the circuit court level does become binding precedent, one that would rule over future cases in the SEC’s home court of the Southern District of New York.

It’s a particularly big deal because Gensler considers crypto exchanges to be securities exchanges. Outside of a smattering of undersized security token exchanges, crypto exchanges have not registered with the SEC.

The appeals process is especially meaningful for the exchanges that list tokens like XRP, and none moreso than…

Coinbase

“This poses an existential threat to Coinbase’s business model, so they’re not backing down,” says Moustakis of SEC v. Coinbase. “After the Ripple decision they didn’t just relist XRP, they did so gleefully and publicly.”

Coinbase is the biggest crypto exchange in the U.S. It is also the only publicly traded, SEC-registered crypto exchange — but it is not registered as a securities exchange.

The complaint’s core allegation is that Coinbase — and, by extension, all other crypto exchanges — is a securities exchange, one that has failed to register.

A sticking point to this dispute is that the SEC has shied away from publicly identifying which crypto assets are securities. According to Coinbase CEO Brian Armstrong, the agency has been clearer in private that Bitcoin alone among crypto tokens falls outside of their purview.

Filed in June of this year, the current Coinbase case is just ramping up, but it is being closely watched and anticipated.

One of the reasons the Uniswap class action suit was so significant is the judge in that case, Katherine Polk Failla, is also presiding over the SEC v. Coinbase case. Consequently, her decision is an opportunity to examine her thinking going forward.

The SEC also claims that Coinbase’s staking service is itself a securities offering, regardless of whether the assets underlying it are themselves securities. They used similar logic to shut down Coinbase’s lending offering without going to court two years ago.

The Genesis/Gemini Case

The SEC case against Genesis and Gemini is largely a cleanup from the era of widespread crypto lending. It concerns Gemini Earn, which allowed users on the Gemini exchange to leave their crypto with the exchange and accumulate interest.

The interest rates in question were significantly better than those offered by bank accounts, especially during the low-interest-rate era of the Trump administration.

The lenders frequently compared their offerings to bank accounts — and indeed, the SEC doesn’t regulate savings and checking accounts. But a key distinction is that traditional banks have FDIC insurance on their accounts.

Crypto lending as a whole has largely collapsed since its heyday in 2021. Partially, it was because the SEC started rounding up these programs near the end of that year. But partially it was because many of them — BlockFi, Celsius, Voyager, to name a few — went bankrupt and left investors high and dry when interlinked chains of risky loans started breaking amid the 2022 crypto collapse.

The Case Against Binance

SEC v. Binance ostensibly resembles the Coinbase case. Binance is the largest international exchange, just as Coinbase is the largest American exchange. The regulator also filed the two suits on consecutive days. 

In addition to a failure to register, the SEC’s complaint against Binance overtly accuses the exchange of defrauding investors and facilitating market manipulation. 

“BAM Trading and BAM Management [dba Binance.US] engaged in acts and practices that operated as a fraud and deceit upon, and made false and misleading statements to, investors,” it reads. 

But Binance has become a black sheep among the major players in the US crypto market as the prospect of criminal charges leveled by the Department of Justice against the exchange now looks nigh-inevitable. Those allegations entail money laundering, sanctions evasion and wire fraud.

“It’s kind of hard to even say it’s speculation right now. It’s clear that they have a very thorny situation with the Department of Justice and at some point that chicken is going to come home to roost,” says Bill Hughes, senior counsel at ConsenSys.

The most recent filing in the SEC’s case was, ominously for the exchange, under seal, meaning that the public cannot view it.

Former head of the SEC’s office of internet enforcement John Reed Stark wrote on Twitter:

My take is that the secret U.S. SEC filing likely relates to an existing U.S. DOJ investigation of Binance and could, directly or indirectly, describe the heretofore unknown contents of an impending U.S. DOJ Binance-related indictment or an indictment already filed under seal — which the U.S. DOJ would prefer to keep secret.”

What’s Next?

Despite the SEC seemingly having a full plate, lawyers consulted doubted that the agency would slow down enforcement in new areas of the crypto market.

Pushing ahead in DeFi is one possibility. At the extreme end of this would be the commission doubling down on Gensler’s suggestion that Ether, the second-largest crypto by market cap, has become a security since it switched over to proof-of-stake. 

“Ethereum has done everything in recent years to run away from the idea of decentralization,” Willamette’s Grey said, calling the Merge “the death knell of decentralization,” and noting that there would be network participants other than a decentralized exchange like Uniswap to bring to court. 

“The claim that would launch a thousand warships…would be that Ethereum is a security,” says Hughes, whose firm, ConsenSys, was founded by Ethereum co-founder Joseph Lubin and is dedicated to building on the same blockchain. “I’m imagining the scene from Avengers: Endgame where everyone came out to fight this battle, and you can imagine who Thanos is.”

As for the SEC’s current caseload, Hughes succinctly ranked the cases in order of likelihood that the SEC comes out on top in each: “Binance 1, Gemini 2, Ripple 3, Coinbase 4.”