Friday, February 23, 2024

Crypto exchange files suit challenging SEC jurisdiction

By Anne Sherry, J.D.

A digital assets company and a trade association are challenging the SEC’s assertion of jurisdiction over crypto. In the complaint against the SEC in a Texas district court, Lejilex and Crypto Freedom Alliance of Texas ask for a declaratory judgment that Lejilex’s crypto exchange is not subject to SEC registration and that the crypto trades on the exchange are not sales of securities (Lejilex v. SEC, February 21, 2024).

Lejilex is a Texas corporation that intends to operate the Legit.Exchange platform, allowing users to trade digital assets in blind bid/ask transactions. Lejilex will not take custody of the assets but will handle administrative functions. The idea is to provide the benefits of non-custodial smart contracts while maintaining the high standards required by large financial firms. Lejilex is also a member of the trade-association plaintiff, the Crypto Freedom Alliance of Texas.

The complaint pushes back against the SEC’s assertion that digital asset transactions are investment contracts because they are expected to appreciate due to the efforts of others. Using that logic, the plaintiffs say, buying Nike sneakers to resell is a securities transaction because the flipper expects to turn a profit based on Nike’s managerial and promotional efforts.

The plaintiffs also invoke the major questions doctrine, a key issue in the SEC’s ongoing action against crypto giant Binance. Congress has not only declined to grant the SEC authority over crypto, the complaint states, but it is considering assigning at least some of that authority to the CFTC. “Given those circumstances, there is no support for the proposition that Congress back in the 1930’s conferred on the SEC regulatory authority over the entire digital asset industry—let alone over the myriad other commodities and assets that the SEC’s sweeping approach would cover.”

In a press release, the plaintiffs echoed the sentiments of other crypto industry players who wished the SEC would work with rather than against them. “We wish we were launching our business instead of filing a lawsuit, but here we are,” said Lejilex cofounder Mike Wawszczak. “Fear of rogue enforcement should not be a thing entrepreneurs are forced to experience.”

Crypto Freedom Alliance of Texas launched last September to advocate for clear and consistent crypto regulation in the state. “Amidst the failures of the federal government to pass sensible legislation regulating digital assets, there is an enormous opportunity for Texas to take a proactive stance by embracing pragmatic and forward-thinking crypto regulations,” states a press release from the launch. Kinjal Shah, Crypto Freedom Alliance of Texas Chair and General Partner at Blockchain Capital, said, “Texas should move forward and lead by example with sensible crypto policies that protect consumers and investors, and foster innovation.”

The case is No. 24-cv-00168.