Paradigm files amicus brief in SEC vs. Bittrex

July 7, 2023 | Rodrigo Seira

TLDR: Paradigm filed an amicus brief in SEC vs. Bittrex that rejects the SEC’s unsupported attempt to expand its jurisdiction over crypto secondary markets.

The SEC’s lawsuit against Bittrex is the first of three cases that the SEC has brought in rapid succession against crypto exchanges. Through these actions, the SEC is wrongfully attempting to lay claim over crypto secondary markets.

Gary Gensler acknowledged in Congressional testimony shortly after he became SEC Chair that the agency lacked the authority to regulate these same secondary markets, noting in clear words that “the exchanges trading in these crypto assets do not have a regulatory framework.” The law has not changed since Gensler made those statements in 2021. However, the SEC now claims to have discovered the same authority Gensler acknowledged was missing and is seeking to impose retroactive penalties on companies for failing to comply with it.

As our brief lays out, the SEC lacks the authority to regulate secondary markets for crypto assets because they do not involve “investment contracts” and are therefore not securities transactions under the agency’s remit.

The SEC’s claims against Bittrex and the other crypto exchanges are fundamentally different from its many prior cases against token sellers. In those prior cases, the SEC exercised its authority to regulate fundraising schemes under the Howey test. But in the recent cases targeting crypto exchanges, the SEC is attempting to expand its authority past the initial fundraising transactions, to encompass downstream sales of crypto assets.

However, even if a crypto asset was first sold in a fundraising transaction, the SEC has no legal basis to argue that the asset itself embodies an investment contract, or that secondary market transactions in that asset are investment contract transactions.

A comprehensive review of every federal appellate case to address Howey confirms that no court has ever held that an asset that is the object of an investment contract transaction is itself a security, nor that a subsequent transfer of that asset in a secondary market is a securities transaction. The SEC’s theories are thus completely unprecedented.

The court should dismiss this case and the SEC should join Congress in working on crypto legislation that supports innovation and protects investors.