Bitcoin continues to rise, and the crypto industry launches a regulatory "counterattack."

Source: Foxbusiness

Compiled by: Ning

According to Fox Business, the cryptocurrency industry has launched a counterattack against U.S. regulators to resist the current crackdown on the digital asset sector led by the Biden administration.

Insiders say this resistance mainly takes the form of lawsuits, lobbying Congress, and challenging enforcement actions by the U.S. Securities and Exchange Commission (SEC) and other federal agencies, but there are no organized leaders of the activities. They added that in recent months, more than six cryptocurrency-related companies have raised objections to government regulation, and this momentum has continued to grow alongside the rising price of Bitcoin. On February 29, Bitcoin briefly surpassed $64,000, reaching its highest point since December 2021, increasing by more than $10,000 in just two days, and is currently reported at $62,427.

Previously, the SEC, dubbed Wall Street's top "cop," and its skeptical chairman Gary Gensler, initiated multiple lawsuits against participants in the industry, claiming that crypto firms were not complying with securities laws and that cryptocurrency companies were refusing to register their securities businesses. In response, crypto firms argued that the existing registration processes are incompatible with the foundational blockchain technology of their businesses, and therefore, no illegal activities exist.

The end result is: both sides express their views, with the SEC taking legal action while also facing challenges and resistance from various crypto firms.

Interestingly, most regulated industries tend to retreat or secretly resist overregulation through behind-the-scenes lobbying when faced with government enforcement actions. However, the approach of the crypto industry is quite the opposite, as industry participants are utilizing various public forums, including courts, to confront regulators openly.

Executives from the industry interviewed by Fox Business stated that they have sufficient funding and legal frameworks to respond to the government's improper regulatory actions. They believe that cryptocurrency is a unique business that cannot be fully integrated into any existing regulatory framework.

"There was a time when the SEC could be seen as a blessing for the industry, but that is no longer the case," said Coinbase Chief Legal Officer Paul Grewal. "The cryptocurrency industry is using the judicial system to push back against overregulation and to seek clear guidance for the industry— and this is having an effect."

01 Legal Precedents Favoring Crypto

The SEC declined to comment, but major participants in the crypto asset industry believe that after Grayscale's victory in August, they have established legal precedents, which ultimately led the SEC to approve 11 spot Bitcoin exchange-traded funds (ETFs) last month, marking a compliance watershed for the crypto industry.

Looking at recent lawsuits, the SEC has shown signs of decline.

In July last year, Ripple Labs won a partial victory when a judge in the Southern District of New York ruled that selling the digital token XRP on the secondary market does not constitute a security and is, to some extent, outside the SEC's jurisdiction.

Currently, other crypto participants believe that the legal basis for the SEC and other regulatory agencies is not solid enough, and the timing for legal challenges has matured. This year, crypto firms have been very active.

Coinbase, the largest cryptocurrency exchange in the U.S. and an active advocate for cryptocurrency policy in Washington, D.C., is currently clashing with the SEC in federal court in New York, disputing the regulator's claim that it is operating as an unregistered securities exchange by selling unregistered securities in the form of crypto tokens on its platform.

Judge Katherine Polk Failla of the Southern District of New York will later decide whether to grant Coinbase's motion to dismiss the lawsuit entirely or allow the SEC's case to proceed to the discovery phase.

Last week, Kraken, the second-largest cryptocurrency exchange in the U.S., announced it had filed a motion in the Northern District of California to dismiss the SEC's lawsuit filed in December, which accused Kraken of operating an unregistered securities exchange and selling similar unregistered securities to investors, just like Coinbase.

The SEC's actions against Kraken and Coinbase indicate its view that some digital assets offered on the platforms of these two companies are unregistered securities, and therefore, the trading constitutes illegal transactions.

Kraken stated that it is pushing back because it believes that under current law, the tokens it offers do not constitute securities, as Congress has not yet legislated whether digital assets are securities, commodities, or belong to a unique category. Kraken claims that the SEC's basis for filing is a theory of regulatory expansion that would effectively "securitize" a wide range of ordinary assets and commodities.

The SEC also sued Binance last June, accusing the world's largest cryptocurrency exchange, its founder Changpeng Zhao, and its U.S. exchange Binance.US of selling unregistered securities to U.S. investors, and Binance is still in litigation over this case.

On the other hand, industry participants and trade groups have expressed support for their peers by submitting "amicus curiae" statements, which are written arguments from individuals or organizations that have a strong interest in a case and seek to influence the court's decision in favor of one side.

In the Ripple case, the cryptocurrency industry submitted 14 amicus curiae statements. Eight were submitted on behalf of Grayscale, and six on behalf of Coinbase. Kraken submitted a non-party opinion statement on Tuesday, supported by the cryptocurrency trade organization Digital Chamber, indicating it would intervene to end the SEC's attempts to regulate the industry without legislative authorization.

James Murphy, founder of Web3 consulting firm Ludlow Street Advisors LLC and a cryptocurrency lawyer, stated, "It seems that the cryptocurrency industry is finally beginning to organize and push back against the SEC's overreach in a coordinated manner."

02 Miners Take the Lead in Counterattack

Fox Business reported last Thursday that another entity in the cryptocurrency market—Bitcoin miners—has filed a lawsuit in the Western District of Texas against the Energy Information Administration (EIA), a subsidiary of the Department of Energy, and the Office of Management and Budget for "illegally" collecting proprietary data from 82 Bitcoin mining companies.

The lawsuit was jointly filed by Texas-based blockchain miner Riot Platforms, the Texas Blockchain Association, and the Digital Chamber, in response to the Office of Management and Budget's approval of the EIA's request to urgently collect data on miners' energy consumption for a new study analyzing the energy impact of cryptocurrency mining in the U.S.

On Friday afternoon, the defendants successfully obtained a temporary restraining order against the EIA, prohibiting the agency from conducting investigations on Bitcoin miners for the next four weeks.

District Judge Alan Albright wrote in the motion granting the temporary restraining order, "The court finds that the plaintiffs have successfully demonstrated that the facts alleged by the defendants in support of the emergency request are insufficient to justify such action. Therefore, this decision may violate the Administrative Procedure Act (APA) and be deemed 'arbitrary, capricious, or an abuse of discretion.'"

The judge also noted that the EIA's estimate of a 30-minute completion time for the investigation was "extremely inaccurate and misleading," citing the defendants' claim that they spent over 40 hours attempting to respond to the investigation questions.

The EIA declined to comment on this matter.

A preliminary injunction hearing is scheduled for February 28, and Riot and its co-defendants plan to testify in hopes of overturning the investigation. A subsequent hearing scheduled for the evening of February 27 was canceled after a conference call among the parties reached a "principled agreement" on potential disputes, with some believing the EIA would completely withdraw the investigation.

"We cannot disclose details at this time," said a spokesperson for the co-plaintiff Digital Chamber. "But we can share updates in the coming days."

03 Regulators Considered "Arbitrary"?

This is not the first time a federal court has referred to a government agency as "arbitrary and capricious."

Last year, the D.C. Circuit Court of Appeals stated that the SEC acted "arbitrarily" when it rejected Grayscale's request to convert its Bitcoin trust fund into a spot ETF. A panel of three judges unanimously voted that the agency's argument regarding the significant differences between a spot ETF tracking Bitcoin's daily price and a futures ETF was insufficient to justify the rejection, especially since the SEC approved the first Bitcoin futures ETF in 2021.

Grayscale's victory ultimately led to the SEC approving 11 spot Bitcoin ETFs, incorporating the world's largest digital asset into traditional Wall Street investors' portfolios, thus creating a growth myth in the past two days.

Ripple Labs is hailed as the first large cryptocurrency company to fight back against the SEC, winning a legal battle that lasted three years in July last year, when a judge in the Southern District of New York ruled that the sale of the digital currency token XRP on the secondary market is not a securities product.

Another government regulatory agency that has found itself targeted by cryptocurrency law is the Federal Reserve. Custodia Bank, based in Wyoming, sued the Federal Reserve in June 2022 after its member bank, the Kansas City Fed, delayed a decision to grant Custodia access to its banking services.

Custodia's lawsuit filed in Wyoming federal court claims that the Federal Reserve Board intervened with the Kansas City branch purely because of its relationship with cryptocurrency and denied Custodia access.

Due to liquidity risks associated with the industry, the Federal Reserve has advised banks to remain cautious when dealing with cryptocurrencies, but a Fed spokesperson declined to comment.

A district judge is expected to rule next month on Custodia's motion for summary judgment (a request for the judge to rule on the case based on the facts and evidence without going to trial).

04 SEC Ensnared in Multiple Lawsuits

At the same time, lawsuits against the SEC continue to pour in from cryptocurrency companies.

New cryptocurrency trading platform Lejilex, along with the industry trade organization Texas Cryptocurrency Freedom Alliance, filed a lawsuit against the SEC in federal court in Texas last week, claiming that the digital assets sold on its platform are not securities.

Hodl Law, a law firm focused on cryptocurrency, recently filed a lawsuit in the U.S. Ninth Circuit Court of Appeals, arguing that it has standing to sue the SEC over unclear cryptocurrency policies.

The company's argument stems from the SEC's decision not to approve Coinbase's 2022 petition, which sought to establish new, comprehensive rules for the crypto industry, arguing that these rules were incompatible with existing regulations governing traditional assets like stocks and commodities.

The commission voted 3 to 2 in December to reject Coinbase's petition, stating that it fundamentally disagreed with Coinbase's argument that the current SEC regulatory framework is "unworkable" for the crypto industry.

Former SEC attorney Marc Fagel stated, "I disagree that the SEC's actions have exceeded its jurisdiction; so far, their enforcement actions have a legal basis. But when it comes to secondary market trading, the novelty of cryptocurrencies makes the law more ambiguous."

Participants and lawyers in the crypto industry believe that the so-called "novel factors" of cryptocurrency—an emerging industry that traditional securities law cannot easily regulate—can be addressed through comprehensive legislation targeting digital assets by Congress. Currently, there are several bills pending in both the House and Senate, but cryptocurrency lobbyists on Capitol Hill say that passing any cryptocurrency-related legislation in an election year will be very difficult, especially with other pressing issues like rising national debt and border crises.

"While we continue to work hard with lawmakers, the cryptocurrency industry must also adapt to the current situation. We are seeking legal avenues to ensure that the industry's voice is heard and that the crypto industry can continue to innovate," said Taylor Barr, senior policy advisor for the cryptocurrency advocacy organization Digital Chamber. "As Congress turns its attention to other urgent matters, our resolve will only strengthen."