Former SEC Lawyers Weigh In: Resolving Crypto Enforcement Issues Will Take Time

The crypto industry had high hopes that the enforcement actions and courtroom battles with the U.S. securities regulator would subside with the change in administration. However, according to former SEC officials and lawyers, shedding the enforcement legacy of SEC Chair Gary Gensler will not be straightforward. The incoming chairman, appointed by President-elect Donald Trump, may be able to clear the decks of future enforcement actions, but dealing with the many ongoing cases will be a more complex and time-consuming process. This could take several months, possibly until 2025 or later, and even then, dramatic case dismissals are unlikely. One of the most prominent outstanding cases is the SEC's battle with Ripple Labs, which represents a high-profile dispute over the company's alleged offering of unregistered securities. The case was initially brought during the tenure of former Chairman Jay Clayton, who was appointed by President Trump. Ladan Stewart, a partner at White & Case and former top enforcement lawyer at the SEC, noted that the SEC's approach to crypto under Gensler is a continuation of the Clayton approach. The SEC will need to re-examine the legal standard known as the Howey test and its application to crypto tokens. The agency has consistently viewed the basic business model of crypto platforms as a violation of securities law, and many tokens are considered securities that cannot be legally traded without registration. The SEC's position on crypto is based on the Howey ruling, which defines what constitutes a security. However, the agency has had a mixed record in crypto decisions in federal courts. Former SEC lawyer Patrick Daugherty suggested that the agency needs to re-evaluate each case on its own merits, and dramatic case dismissals might not occur. The alternative could be structured settlements where crypto firms do not admit wrongdoing but agree to comply with the agency's guidelines. Paul Grewal, the chief legal officer for Coinbase, expects Trump's team to move swiftly, despite the messy track record of his first term. Grewal's first choice is complete dismissal, but he is open to discussion. The SEC could vote to stop litigating or settle cases, but this decision cannot be made unilaterally by the chairman and requires a commission majority. The problem is that major decisions, including dismissals, settlements, and enforcement actions, cannot be handled solely by a new chairman and senior legal staff. At the federal appellate court level, the agency's general counsel supervises these matters, and the commission's majority approval is needed to withdraw an appeal entirely. If Trump promotes Republican SEC Commissioner Mark Uyeda to be acting chairman, Uyeda would still need to secure a commission majority for significant decisions. The agency can quickly change how it handles cases that have not yet been brought or investigations that are still ongoing. Ladan Stewart predicts that the SEC will not pursue registration-only cases, and Coinbase's Grewal assumes the new SEC will carefully separate cases focusing on fraud or scams from more technical cases that have not resulted in consumer harm. Commissioner Uyeda has suggested halting new actions against crypto firms for registration violations while the regulator figures out the process. The crypto industry's weight has been felt, and it will likely get a friendly SEC leadership. The new enforcement director will be crucial in directing resources to cases involving egregious fraud and pulling the plug on those that do not. Crypto enforcement will not stop entirely, but its nature may shift.