The US Securities and Exchange Commission (SEC) has initiated legal action against DRW Holdings' crypto division, marking a new chapter in its ongoing efforts to regulate the emerging cryptocurrency sector. The SEC accuses Cumberland DRW, the company's crypto arm, of operating as an unregistered dealer for over $2 billion in digital assets, which the agency classifies as financial securities.
The lawsuit examines the firm's activities since early 2018, alleging that they conducted round-the-clock trading without proper registration. Jorge G. Tenreiro, Acting Chief of the SEC’s Crypto Assets and Cyber Unit, reiterated the agency’s position: “Federal securities laws mandate that all dealers in securities must register with the Commission, including those in the crypto asset markets.”
The SEC's complaint specifically charges Cumberland with breaching Section 15(a) of the Securities Exchange Act of 1934. The legal action seeks permanent injunctive relief, the return of illicit profits, prejudgment interest, and civil penalties.
What is Cumberland DRW?
Established in 2014, Cumberland DRW has become one of the leading trading desks in the cryptocurrency sector. Originally founded by Don Wilson in 1992, the company gained prominence for its activities in the derivatives market. Known as key liquidity providers in the crypto ecosystem, Cumberland DRW offers services such as over-the-counter trading and bilateral options products through its online platform, Marea, and telephone trading service. The firm has facilitated participation for over 1,500 accredited investors and institutional players in the crypto market, ensuring a secure and robust platform experience.
In June this year, Cumberland DRW secured a license to operate a cryptocurrency business in New York, reflecting its commitment to adhering to industry regulations.
The SEC Once Again Classifies Five Crypto Tokens as Securities
The agency alleges that Cumberland breached securities laws by operating as an unregistered dealer facilitating third-party transactions. The SEC's complaint, though not exhaustive, highlights five crypto assets it deems securities: Solana (SOL), Polygon (MATIC), Cosmos (ATOM), Algorand (ALGO), and Filecoin (FIL).
"Cumberland, through the Marea Platform and other means, trades crypto assets offered and sold as investment contracts, thereby qualifying as securities. Each asset was marketed as an investment in a common enterprise, where investors reasonably expect profits or returns from the entrepreneurial or managerial efforts of others," states the legal complaint.
This stance reinforces the agency's contentious view of crypto assets, treating them similarly to traditional securities. Despite pushback from industry leaders, the SEC continues to apply regulations originally intended for conventional assets like stocks to the blockchain sector.
Additionally, the SEC claims that Cumberland employs a team of researchers who produce materials for investors, portraying crypto assets as "investment opportunities."
"Cumberland's research reports and update emails promote crypto assets as investments, encouraging investors to reasonably anticipate profits from these investments based on the entrepreneurial and managerial efforts of the issuers and promoters of the specific crypto assets discussed in those reports and emails," the lawsuit asserts.
Cumberland Will Fight the SEC in Court
Cumberland DRW has announced its plan to challenge the SEC in court, describing the situation as "an incredibly frustrating and disappointing development."
"We, along with others in the crypto industry, have consistently sought guidance from regulators regarding the application of securities laws to cryptoassets. The SEC's decision to respond to these good-faith efforts with legal action is frustrating and disappointing, though not unexpected given the SEC's recent enforcement-first approach," a company spokesperson stated.
The firm emphasized its compliance with federal regulations, including acquiring a registered broker-dealer in 2019. However, Cumberland had to restrict this company's activities to Bitcoin (BTC) and Ether (ETH), significantly impacting its business viability.
They also mentioned a legal victory against the Commodities and Futures Trading Commission (CFTC) in 2018, where they were accused of market manipulation. The judge dismissed the case, citing insufficient evidence from the regulator.
The SEC Keeps Fighting Crypto Companies Instead of Providing Regulatory Clarity
The lawsuit against Cumberland DRW is part of a broader trend of SEC enforcement actions targeting the cryptocurrency industry. Recently, the agency has pursued similar actions against several companies, including Kraken, Coinbase, Consensys, and Uniswap, with some cases still pending. This assertive stance, led by SEC Chair Gary Gensler, has faced criticism from industry stakeholders and some US politicians. They contend that the SEC is employing a "regulation by enforcement" strategy instead of offering clear compliance guidelines for the rapidly evolving crypto sector. Conversely, the SEC maintains that it is simply enforcing existing laws.
The SEC's actions have extended beyond trading platforms and dealers. Recently, Crypto.com initiated a lawsuit against the SEC after receiving a Wells Notice, which signaled the regulator's intent to sue the digital asset exchange for operating as an unregistered broker-dealer and securities clearing agency. This lawsuit targets a crypto trading desk primarily serving accredited investors and institutional clients, indicating the agency's broader regulatory focus in the digital asset sector. Previously, the SEC mainly concentrated on companies offering "securities" and services to retail investors. This lawsuit suggests the agency might be planning similar enforcement actions against companies providing services like those of Cumberland. The outcome of this case, along with other ongoing proceedings, could establish significant precedents for applying securities laws to cryptocurrencies and related businesses. Additionally, the upcoming US presidential election could influence the SEC's approach to crypto regulation, as former President Donald Trump, a pro-crypto candidate, may bring changes to the SEC's leadership, potentially affecting the agency's actions and perspectives on the sector.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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