It’s no secret that the crypto industry has a chilly relationship with the U.S. Securities and Exchange Commission (SEC). It wasn’t always this way — the SEC’s views on crypto have shifted over time. In Bitcoin’s early days, the SEC’s approach to crypto was largely benign neglect. During and after the initial coin offering (ICO) bubble of 2016-17, the SEC started to take interest in the space, engaging in selective enforcement and providing the beginnings of guidance.
Jake Chervinsky is chief legal officer at Variant, where he manages the firm’s legal work and helps portfolio founders navigate regulatory strategy.
Amanda Tuminelli is chief legal officer at the DeFi Education Fund, where she leads the organization’s impact litigation and policy efforts.
In recent years, however, the SEC has taken a strong position in the anti-crypto camp. The current SEC appears to believe that the securities laws apply to the vast majority of crypto transactions and that most crypto industry participants are breaking the law. The agency has shown no signs of pursuing a path to compliance for the industry, instead prioritizing regulation by enforcement against stalwart companies like Coinbase and Kraken, among many others.
The SEC’s hostility toward crypto leaves the industry in a difficult spot. Many builders are afraid to operate in the United States due to fear of an SEC enforcement action. Even builders who spend hundreds of thousands of dollars on law firms still feel the chill of the SEC’s threat, since the high cost of defending an enforcement action can be devastating to a young company regardless of the outcome. As a result, many crypto companies are forced to act like sitting ducks, keeping their heads down and hoping the SEC looks elsewhere.
But this week the industry went on offense.
On Wednesday, a new crypto trading platform called Lejilex filed a lawsuit against the SEC in a federal court in Texas alongside its trade association, the Crypto Freedom Alliance of Texas. In the lawsuit, Lejilex argues that secondary market sales of digital assets do not constitute securities transactions and thus fall outside the scope of the SEC’s jurisdiction.
The argument is similar to one Coinbase is making against the SEC in its enforcement action in federal court in New York, and it closely tracks industry lawyers’ prevailing views on how the securities laws apply to crypto.
The Lejilex lawsuit is a perfect example of “impact litigation” — the practice of bringing strategic lawsuits in court that present well-considered legal questions, with the goal of achieving lasting effects beyond the case itself.
Classic examples of impact litigation in the United States go back to the civil rights movement of the mid-20th century. In case after case, public interest groups convinced the courts to expand the constitutional guarantees of individual liberty and equal protection, scoring victories on issues like school desegregation, interracial marriage and the right to contraception. More recently, advocates have used impact litigation to curtail the size and power of the administrative state, attacking unjustified regulations through strict statutory interpretation.
It may seem unusual to think of the judiciary as the branch of government where individuals can appeal for better policy. After all, the legislature (Congress) is responsible for passing laws, and the executive (the White House and the administrative agencies, including the SEC) is responsible for enforcing them. But for many decades, the courts have played a crucial role in shaping the law to serve public policy goals and benefit society. Using impact litigation to present the courts with key questions of national significance is a tried-and-true method for bringing about meaningful change.
Impact litigation is particularly useful when the following are true: (1) the executive branch and its agencies are misinterpreting the law; (2) the legislature is moving too slowly to correct the executive’s error; and (3) the judiciary has the interpretive tools to get the law right.
All three are unequivocally true for the crypto industry. As Lejilex explains in its complaint, and as Coinbase argued in its motion for judgment on the pleadings, the SEC misinterprets whether and how existing law applies to digital assets. Congress is making progress on new legislation specific to crypto, but it’s hard to imagine House Republicans and Senate Democrats reaching consensus during an election year — and even harder to predict what will happen in 2025 and beyond. Meanwhile, the courts are embracing interpretive tools like the major questions doctrine to strike down regulations that lack clear congressional authorization.
But the best argument in favor of impact litigation is the industry’s track record in court. Last year, Ripple Labs scored a big victory over the SEC when Judge Torres declared that secondary sales of XRP were not securities transactions, among other important rulings. Similarly, Uniswap Labs won a thoughtful opinion from Judge Failla — who will also decide the Coinbase case — describing the nature of smart contracts and carefully distinguishing the protocol, user interface, software developers and token creators in determining liability. And Grayscale convinced a panel of three circuit judges to unanimously overturn a decade of SEC precedent, which finally paved the way for the approval of spot bitcoin ETFs.
Impact litigation can be highly effective, but it’s also a blunt tool for shaping policy: it’s slow, expensive, and unpredictable. If crypto policy advocates could choose between a workable path to compliance and a bet-the-industry fight to the death in the courts, no doubt they would all choose the path to compliance.
Unfortunately, the SEC’s approach to crypto leaves the industry with little choice but to flee, fail, or fight. This week, Lejilex decided to fight through litigation. It certainly won’t be the last.
