Shifts in U.S. Crypto Enforcement May Spark Wave of Private Lawsuits

This summarizes an article coauthored by Kobre & Kim’s Sydney Johnson and Calvin Koo published by CoinDesk. Click here to read the full article.

The U.S. Securities and Exchange Commission (SEC) has recently shifted its approach to regulating the digital asset industry, moving away from aggressive enforcement actions towards establishing clearer regulatory guidelines. This change has resulted in the dismissal or suspension of several high-profile cases against major cryptocurrency businesses, including Coinbase, Kraken, and Cumberland DRW LLC, for whom Kobre & Kim secured a favorable resolution with no financial penalties to the client.

However, this regulatory retreat does not preclude private plaintiffs from pursuing legal action. With no pending appellate-level cases to establish binding precedent on the application of federal securities laws to particular digital asset transactions, the legal interpretative landscape remains ambiguous. As a result, private plaintiffs in the digital asset space can still use the federal securities laws as a basis to bring a variety of allegations, including:

• Selling unregistered securities
• Engaging in the sale of securities through a prospectus (e.g., white paper) containing untrue statements or omissions of material facts
• Committing securities fraud or engaging in other misconduct, including schemes like rug pulls or pump-and-dump operations
• Violations committed by individuals with decision-making authority over the seller, including founders or company leadership

Businesses in the digital asset sector re-evaluating their legal risk should confer with their legal teams about whether they may be targets of private or public litigation by considering the following proactive strategies:

1. Understand the Landscape. In the absence of binding decisions from appellate courts, grasping the key authorities in relevant districts is crucial. Analyzing how previous cases in lower courts align with the SEC's current interpretative guidelines can provide persuasive support for a legal theory, especially as the SEC reduces its enforcement activities.
2. Be Prepared. Companies should keep accurate records of trades, investment strategies, and other business factors. As private litigation increases, having clear documentary evidence and justifications becomes crucial when facing decreased regulatory enforcement or ambiguous interpretations.
3. Be Proactive. While recent shifts indicate a decline in SEC enforcement in the digital asset space, Commissioner Hester Peirce has stated that the shift in priorities and resources is not an end to SEC enforcement. Businesses should develop a strategy that addresses authorities’ potential questions and helps regulators gain a deeper understanding of their business and the market context. Fostering constructive dialogue and consideration of diverse market perspectives may yield positive results given the new SEC administration’s stated openness for such discussions.