Shift in SEC's Crypto Enforcement Strategy May Spark Rise in Private Lawsuits

The digital asset industry was previously locked in a high-stakes battle with the U.S. Securities and Exchange Commission. For several years, the SEC employed a stringent enforcement strategy against the industry, targeting platforms for failing to comply with unclear or non-existent regulations regarding securities and registration requirements. However, under new leadership, the SEC has announced the end of this enforcement era. While this shift significantly reduces the industry's exposure to regulatory lawsuits, it also creates an opportunity for private plaintiffs to fill the enforcement gap and pursue ambiguities in federal securities laws by filing lawsuits in U.S. courts. These lawsuits may claim that specific digital assets are securities and seek to hold companies and their leaders accountable for alleged misconduct, such as withholding material information, in violation of securities laws. The SEC's new approach focuses on prosecuting fraudulent activities and bad actors in the digital asset space, indicating a decline in enforcement actions. As the SEC's enforcement efforts decrease, private plaintiffs are likely to step in and exploit the resulting void, pursuing litigation that can be costly for businesses and their founders, even if they ultimately prevail. Private plaintiffs may use federal securities laws to bring various allegations, including violations of state securities laws and common law causes of action. Although the SEC's revised interpretation of securities laws aligns more closely with industry perspectives, it does not influence court decisions on whether a digital asset constitutes a security. As a result, companies should anticipate an increase in private litigation, particularly in areas such as meme coins, where private plaintiffs may argue that specific circumstances bring these assets within the scope of federal securities laws.