SEC faces fierce battle against crypto’s legal firepower

The U.S. Securities and Exchange Commission’s legal battles against cryptocurrency firms, once likened to David versus Goliath, now resemble Godzilla versus King Kong, given the industry’s growth to a $2.5-trillion market.

With the SEC continuing to open up new fronts in its war on crypto, some are now wondering if it has spread itself too thin and has the legal resources needed to fight so many court cases at once against the industry’s largest players. 

“The fact that these (enforcement actions against crypto firms) are all going on at one time is very significant and absolutely puts a strain on the agency,” says Scott Mascianica, partner and head of government investigations and regulatory enforcement at Hilgers Graben law firm.

Members of the legal community tell Magazine that the SEC may be facing resource constraints, travel budget cuts and reduced funds available to pursue matters as aggressively as they could before the onset of numerous crypto-focused litigations.

The SEC declined to comment on the subject in response to Magazine’s requests.

SEC has a large budget and considerable legal resources

But it’s not the SEC’s first day on the job. Wall Street’s top regulator has been a highly litigious watchdog in the 90 years since its establishment in 1934. Its recent $2.6-billion budget request for the 2025 fiscal year aims to add to its war chest, and it doesn’t usually pick fights that it plans to lose.

But the large volume of crypto prosecutions may be due to an unusual set of circumstances. Some believe the recent increase in Wells notices may be tied to the looming end of SEC Chair Gary Gensler’s term, which ends in mid-2026. With polls suggesting a change of government is certainly possible in November’s U.S. presidential election, there’s every chance he will not be reappointed for another term to see his crypto crackdown policies through to completion.

“In some ways, this represents the last chance for (Gensler) to cement his priorities and legacies in the agency,” Ben Sauter, of counsel at McGovern Weems, tells Magazine, adding that the timing of the elections brings an incentive for the SEC to wrap up some of its ongoing investigations. 

“So, it’s not surprising that you see some of these Wells notices and posturing happen now or will continue to happen over the next several months,” Sauter says.

SEC crypto prosecutions jumped 53% in 2023

As of the end of 2023, the SEC’s monetary penalties against crypto-related firms and individuals totaled $2.89 billion, with $281 million from last year alone, according to Cornerstone Research. Since its first action against the industry in July 2013, the SEC has brought a total of 173 crypto-related enforcement actions as of the end of 2023. 

Last year, the SEC initiated a total of 46 crypto-related enforcement actions, marking a 53% increase from 2022.

“They have the energy and the resources to continue to pursue these claims, (and) they don’t seem to be slowing down,” Natalie Lederman, partner at Sullivan & Worcester, tells Magazine.

Blizzard of SEC Wells notices for crypto firms in 2024

It hasn’t missed a beat this year, as the agency fired off Wells notices in quick succession to DeFi heavyweight Uniswap and the stocks and crypto broker Robinhood for allegedly violating securities rules. Both companies have vowed to fight back against the agency.

“The acceleration is part of the point: The SEC is attempting to hobble as much of the crypto ecosystem as possible as quickly as possible before the November elections,” Marisa Coppel, head of legal at the Blockchain Association, tells Magazine.

“However, it’s clear that the crypto industry has decided, rightly, to fight back against this intimidation campaign, and we believe the courts will view our arguments favorably,” she says.

The Blockchain Association’s view aligns with that of its former head of policy, Jake Chervinsky, who is now the legal chief of crypto at venture capital firm Variant. After Robinhood’s Wells notice became public in early May, Chervinsky publicly accused the SEC of abusing the Wells process as a scare tactic.

While the SEC declined Magazine’s request to address the criticisms directly, Gurbir Grewal, the current director of enforcement at the SEC, said in a 2022 speech that the agency does not “play games” during its investigations or litigations, including Wells notices.

“If we tell you we plan to recommend charges, it means that we are prepared to litigate any resulting action.”

Crypto industry has best law firms crypto money can buy

The titans of the crypto industry have enlisted extremely expensive, top-tier legal firms for representation.

Consensys, a software firm run by Ethereum co-founder and billionaire Joe Lubin, filed a preemptive lawsuit against the SEC after it received a Wells notice, which typically precedes enforcement actions. As the developer of the Ethereum wallet MetaMask, Consensys seeks to prevent the SEC from classifying Ether as a security. The odds may lean towards ConsenSys if spot Ethereum ETFs are approved under Commodity-Based Trust Shares filings.

Wachtell, Lipton, Rosen & Katz, a prestigious law firm known for representing high-profile clients like OpenAI and Twitter (now X), is putting forward the Consensys case in this dispute. The firm has a history of representing major financial institutions, including JPMorgan Chase’s purchase of Bear Stearns during the 2008 financial crisis, a case that involved extensive SEC oversight.

Wachtell, in conjunction with another legal firm, Sullivan & Cromwell, also represents Coinbase, which the SEC is suing for operating as an unregistered broker. Sullivan & Cromwell is renowned for handling high-profile legal cases, such as AT&T’s $85-billion acquisition of Time Warner in 2018.

SEC’s legal victories against crypto

Despite facing considerable legal firepower, the SEC has recently achieved several victories, including a recent win against Coinbase, where a district judge dismissed the exchange’s bid for the lawsuit to be dropped and ruled it could proceed based on preliminary arguments.

Some of the agency’s most successful case settlements include $45 million from Nexo ($22.5-million penalty to the SEC and the other half to state regulators), $18.5 million from Telegram, Poloniex’s $10 million and $5 million from Kik.

In 2023, the SEC charged several entities with crypto-related fraud, including Terraform Labs and its founder, Kwon Do-hyung; Richard Heart and his entities; and FTX founder Sam Bankman-Fried.

Sauter says that federal agencies usually focus on enforcement actions against the “absolute worst actors” in the early stages of novel markets to score “easy wins” and set precedents.

“Then they’ll use those precedents to lever up and go against higher-profile defendants,” he adds. “I think that’s the stage they’re at now.”

Crypto industry’s legal victories against the SEC

However, the crypto industry has also seen victories. 

Ripple Labs, defended by the all-star lineup of Paul Weiss, Cleary Gottlieb and Debevoise, achieved a partial win in July when a judge ruled that the XRP token was not itself a security and that Ripple had not violated securities laws by listing XRP on exchanges. Ripple was found to have violated the law in direct sales to institutional investors.

Grayscale is perhaps the most prominent example of a major industry player taking on the SEC and winning after it successfully sued the SEC to get its spot Bitcoin ETF approved, a financial product that the SEC denied for a decade.

And the SEC was sanctioned by a judge for its “gross abuse of power” in making misrepresentations while attempting to secure a temporary restraining order against the Utah-based crypto company Debt Box. Two SEC lawyers resigned as a result.

Unwrapping the SEC’s enforcement division

The enforcement division is possibly the most important unit when it comes to the agency’s regulatory actions against the crypto industry. It is the division that is ultimately responsible for investigations and enforcement actions against securities rules violators.

The division received more than 35,000 tips and complaints from the public in the 2022 fiscal year, more than double the total in 2016, according to Gensler. Despite the surging work demand, the size of the agency’s enforcement unit shrank by 5% throughout this period.

However, as the flurry of enforcement actions against the crypto industry ramped up last year, so did the enforcement division’s headcount.

“The SEC has a history of hiring smart lawyers who dedicate their careers to important government service,” Coppel says.

“Recently, the SEC has had to scramble to hire a raft of new lawyers to keep up with the myriad actions filed against and by the commission.”

In 2023, the SEC requested to grow its enforcement division to 4% larger than its size in 2016. It reported 1,325 full-time equivalent employees. This year, this number is expected to grow to 1,420, and the latest budget request would raise its full-time equivalent wishlist to 1,447 professionals.

This shows that the agency has been enhancing its capacity to issue more enforcement actions, suggesting that the crypto industry should anticipate a tough fight ahead. 
In early May, Commodity Futures Trading Commission Chair Rostin Behnam said that there will be another cycle of enforcement actions in the crypto space in the next 24 months.

$800 million for enforcement division in 2025

In March, the SEC requested an annual budget of $2.6 billion for the 2025 fiscal year, with an estimated $800 million of that going to the enforcement division.

The SEC’s budget is relatively small when compared with other crypto enforcers, such as the Department of Justice’s recent $37.8-billion budget request. But it’s also not a small amount.

“This is a federal agency that does have significant resources at its disposal with the ability to draw resources from different offices and different regions when they need to in order to handle high-profile litigations,” says Mascianica, who served the SEC’s Fort Worth branch as an assistant director of the enforcement division.

He says they have never seen the need to hire outside counsel to shore up the numbers. 

“I was there for about 10 years. I’ve never heard of the retention of outside counsel for the agency,” Mascianica says.

“In terms of handling the SEC’s enforcement actions, the substance of them, those are handled in-house, usually by the SEC’s trial unit within their Division of Enforcement.”

The SEC, with 11 regional offices, including Fort Worth, has leveraged additional federal resources for its cryptocurrency enforcement initiatives. 

According to Cornerstone, since December 2017, the SEC has collaborated with other federal agencies in 67 out of 164 enforcement actions targeting the industry. Key partners include the U.S. Attorney’s Offices, the Federal Bureau of Investigation, the Commodity Futures Trading Commission and the Internal Revenue Service.

And contrary to perceptions in the crypto industry, the SEC’s enforcement actions appear carefully planned and assessed rather than being a chaotic whirlwind of lawsuits handed out indiscriminately.

In order for the SEC to pursue an enforcement action, it first starts with the compilation of evidence by the investigative staff within the enforcement division, which is presented to the trial attorneys, according to Mascianica. 

A case’s prospects are assessed, including the risks and possibilities of losing the case. The team’s recommendation on whether or not to file an enforcement action is then presented to the five SEC commissioners in Washington, D.C.

Is the crypto crackdown because Gary Gensler’s time is short?

In November, there is going to be an election in the United States. Will this prompt a change of strategy by the SEC?

The shifting political landscape, particularly Democrats’ concerns about potential losses in the November elections, may prompt the SEC to reconsider its stringent regulatory approach.

Mascianica, who went through multiple administration changes during his tenure with the regulator, says there’s usually no immediate change in enforcement for straightforward cases like clear-cut insider trading or egregious offering fraud.

But with cases that have a stronger divergence of views, “there is where you see the change.”

“We can see any time that Commissioner (Hester) Peirce or Commissioner Mark (Uyeda) is issuing a dissent or a statement to a specific enforcement action, you are seeing a sharp divergence in views about scope and approach,” Mascianica says.

“I do think that the crypto industry is one area where there could be a very significant change if there is an administration change and then ultimately a change at the head of the SEC,” Mascianica says.

That is because the chair of the SEC, who is always the tipping vote in that five-person commission, ultimately appoints the director of enforcement, he adds.

Gensler said in a recent interview that he plans to stay at the agency’s helm if current President Joe Biden wins the upcoming elections for a second term. If Biden loses, however, history suggests that Gensler will likely be on his way out.

Meanwhile, Lederman points to recent comments from House Financial Services Committee Chairman Patrick McHenry, who accused Gensler of misleading Congress.

McHenry claims that the SEC had already classified Ether as a security before a hearing in April 2023, when Gensler declined to answer questions regarding the asset’s classification.

The SEC is often criticized for its regulation-by-enforcement approach, as legal professionals and the crypto community “desperately” wait for the agency to provide regulatory clarity.

“It seems like everybody’s tolerance for the SEC’s delay in acting here is dwindling,” Lederman says.

“I think it’s fair that we can anticipate some congressional hearings on this subject matter in the coming weeks.”

It is possible that the industry may not have to wait much longer for legal clarity as the SEC’s authority over the crypto industry now faces its biggest threat.

The U.S. House of Representatives will vote on the Financial Innovation and Technology for the 21st Century Act (FIT21) this week. The bill hands more power to the CFTC to regulate decentralized cryptocurrencies, clarifies SEC jurisdiction over digital assets involved in investment contracts and provides a pathway to launch crypto projects.

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Yohan Yun

Yohan Yun is a multimedia journalist covering blockchain since 2017. He has contributed to crypto media outlet Forkast as an editor and has covered Asian tech stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking, and experimenting with new recipes.