Crypto platform Bittrex seeks to dismiss SEC enforcement action, citing ‘major questions’ doctrine

By Lene Powell, J.D.

Crypto asset trading platform Bittrex moved to dismiss an SEC enforcement action against it, arguing the SEC has failed to support critical elements of its claims. Bittrex also contends the SEC lacks the “clear congressional authorization” necessary to apply the securities laws to crypto tokens under the Supreme Court’s “major questions” doctrine (SEC v. Bittrex, Inc., June 30, 2023).

In a separate motion to dismiss, Bittrex’s foreign affiliate, Bittrex Global GmbH, argues the SEC failed to show that Bittrex Global acted as an exchange for domestic securities transactions.

The SEC charged Bittrex, Inc. and its former CEO in April with operating an unregistered national securities exchange, broker and clearing agency. The SEC also charged Bittrex Global for failing to register as a national securities exchange.

Bittrex says the action is “misguided” because the company has wound down its U.S. operations, repaid customers, and entered bankruptcy. Bittrex, Inc. announced on March 31 it was winding down U.S. operations and filed for Chapter 11 bankruptcy on May 8.

Major questions doctrine. Front and center is Bittrex’s argument that the SEC lacks “clear congressional authorization” under the major questions doctrine set out by the Supreme Court in West Virginia v. EPA (2022). Under that doctrine, an agency must point to clear congressional authorization for the authority it claims.

Bittrex argues:

• The status of the transformative, trillion-dollar crypto industry under the securities laws qualifies as a “question of exceptional economic and political significance.”
• The SEC fails to identify the requisite clear congressional authorization.
• The tokens traded on Bittrex’s platform fall “far outside anything Congress has ever regulated as a security.”
• The core requirements of the securities laws are “inherently incompatible with the decentralized nature of crypto.”
• These are all “hallmarks of a major question beyond agency reach,” said Bittrex.

Missing elements. Bittrex next argues that the SEC failed to allege that any transactions on Bittrex’s platform were transactions in “securities” within the meaning of the Exchange Act.

According to Bittrex, the SEC does not allege that secondary-market transactions in tokens are transactions in investment contracts, because the SEC’s allegations turn almost entirely on the transactions by which the tokens were first issued by the developer—not on subsequent transactions by which the tokens traded on Bittrex’s platform.

When a token is offered or sold on the secondary market, there is no contract between a token purchaser and the token developer, much less an “investment contract,” said Bittrex. Accordingly, Bittrex cannot be liable for registration violations under the Exchange Act provisions cited by the SEC.

Inadequate notice. Bittrex further argues that the SEC failed to provide fair notice that Bittrex’s conduct was illegal.

Bittrex argues:

• The SEC alleges that Bittrex “made available . . . for trading” more than 300 different tokens, yet identifies just six tokens that it alleges represent “examples” comprising a “non-exhaustive list” of tokens that were traded as investment contracts (and thus securities) on the Bittrex platform. The defendants and the court are thus kept in the dark regarding the full scope of the SEC’s claims. The SEC must provide a “defined and exhaustive list” of tokens at issue.
• The SEC violates the Due Process Clause by failing to provide the defendants with fair notice that the conduct at issue was in fact prohibited. In an “apparently strategic decision,” the SEC has provided “no meaningful public guidance about which tokens are subject to regulation as securities” before mounting enforcement actions. Instead, the SEC has “issued a series of contradictory and inscrutable public statements coupled with seemingly arbitrary enforcement actions.”

Control person liability. Bittrex also argues that the SEC’s separate claim for control-person liability against Bittrex co-founder and former CEO William Hiraoki Shihara should be dismissed because that claim is entirely derivative of the claims against Bittrex, all of which fail.

Bittrex Global arguments. In a separate motion to dismiss, Bittrex Global argues along the same lines that the SEC fails to state its “clear congressional authority” to regulate crypto assets under the major questions doctrine; that the SEC does not adequately allege that any of the tokens at issue are a “security;” and that the SEC violated due process and fair notice requirements.

Bittrex Global further argues that the SEC failed to allege that Bittrex Global acted as an exchange for domestic securities transactions. According to Bittrex Global, the SEC does not allege that Bittrex Global had a single U.S. customer. Moreover, Bittrex Global is legally distinct from Bittrex US and operates on technology and servers based outside the U.S.

Bittrex contends that the below SEC allegations are insufficient to subject Bittrex Global to U.S. registration requirements:

• Bittrex Global is affiliated with a U.S. entity (Bittrex US) that operated a U.S.-based trading platform for U.S. customers;
• Bittrex US “maintain[s]” the technology powering an order book and matching engine;
• Bittrex Global contracted with its affiliate to obtain the “right to use” its affiliate’s technology and that through the use of this technology, Bittrex Global’s foreign customer orders could be matched with those of Bittrex US customers in an unspecified location.

Motion to dismiss. Based on the above, Bittrex, Inc. and Bittrex Global argue the SEC complaint should be dismissed with prejudice.

Other enforcement actions. The SEC action against Bittrex takes place against a backdrop of other regulatory enforcement actions.

• Bittrex previously agreed to pay over $53 million to settle OFAC and FinCEN enforcement actions related to sanctions and anti-money-laundering violations.
• Bittrex also entered into a consent order to cease doing business with customers in Texas.

Critically, the Bittrex action is also proceeding at the same time as other SEC enforcement actions against crypto trading platforms for alleged failure to register as securities exchanges. Although the SEC’s actions against Coinbase and Binance are in different districts than Bittrex, court rulings in those actions are likely to be relevant in Bittrex, and vice versa.

This is case No. 2:23-cv-00580 (Bittrex, Inc.; Bittrex Global GmbH).