Novel Crypto Rulings to Fill Case Flow Void Left by Trump’s SEC

Courts will hear a wider variety of cryptocurrency claims after changes in Washington have left a gap in traditional cases, attorneys say.

The judiciary will turn to class actions initiated by investors as a primary forum to decide which laws apply to the assets, a pivot away from enforcement actions brought by the government. The Securities and Exchange Commission moved the battle lines this year by dropping almost all of its crypto enforcement cases, previously the major engine for court holdings that digital asset transactions, accounts, and exchanges are subject to the securities laws.

Congress, meanwhile, is expected to sort out which bodies of law and which regulators govern which categories of digital assets. And that will set off a new round of judicial interpretation and application, said Eileen Duffy Robinett of Thompson Coburn LLP.

Judges will deal with the cases brought to them, no matter what body of law those cases are brought under, said Patrick Daugherty of Foley & Lardner LLP.

“We’ll have cases brought by the SEC for fraud and manipulation of crypto assets that are securities; we’ll have the [Commodity Futures Trading Commission] suing for fraud and manipulation of crypto assets that are commodities; and we’ll have the plaintiffs’ bar suing for fraud wherever they see it,” he said.

As lawyers press a variety of claims to address fraud—a broader array than the SEC asserted—courts are there to assess what works. Two judges recently allowed plaintiffs’ state law claims to proceed where federal laws couldn’t, in a case over the stablecoin GYEN and a suit against Ripple Labs Inc.

“Are there some more teeth under certain state laws than under the federal statutes right now?” said Lauren Ormsbee of Labaton Keller Sucharow LLP, who represents investors. “It’s possible.”

Short Term

The Trump administration’s SEC created a crypto task force that meets with industry players and is conducting a series of public roundtables to provide greater clarity to the crypto industry through regulation. It has also begun speaking up about crypto areas where it might not have primacy.

Commissioner Hester M. Peirce said at the DC Blockchain Summit on March 26 that “the Commission needs to think separately about transactions and assets that are the subject of transactions” as it begins to clarify what’s inside and outside its jurisdiction. “Many crypto assets themselves are not securities, but primary offerings of crypto assets for capital raising purposes are securities transactions,” Peirce said.

The SEC’s Division of Corporate Finance, meanwhile, has said memecoins are “akin to collectibles.”

But despite such pronouncements—and new commission positions and rulemaking—courts will likely have the final word on what qualifies as a security before Congress acts, attorneys say. The issue is currently governed by the US Supreme Court’s test in SEC v. W.J. Howey Co., which interprets the Securities Act of 1933.

A party could cite a new SEC position, or the commission could submit an amicus brief in civil suits. But the SEC can’t answer the crypto jurisdiction question for a court, said Adam Moskowitz, a class action attorney who co-leads representation for plaintiffs in the consolidated FTX litigation. The 2024 Supreme Court decision in Loper Bright Enterprises v. Raimondo undid the 40-year-old Chevron doctrine, under which courts deferred to agency interpretations of ambiguous laws.

Moskowitz gave the example of the SEC’s recent memecoin statement. Given the Loper Bright ruling, “I’m not too upset if the SEC says memecoins are not securities,” Moskowitz said. “I’ll file a lawsuit in federal court, and my judge will say, ‘Under the Howey test, it is.’”

“The SEC has limited power to change the meaning of the Howey test, which is at the center of all this,” said Daugherty, who also teaches at Northwestern Pritzker School of Law and Cornell Law School. Changing the test’s application to digital assets would require Supreme Court or congressional action, and no Supreme Court case is on the horizon, he said.

“Howey‘s been out there for 80 years, and it’s worked up until this point,” said Robinett. “But it doesn’t really fit well with how these particular assets are traded.”

Crypto Framework Sans Howey

Congress has already been working versions of a so-called market structure bill, which most members want, Daugherty said. The legislation would change oversight of digital assets in several ways, including assigning jurisdiction over specific types to the CFTC or the SEC, he said.

Such a step could take the courts out of the business of applying the Howey test to crypto assets.

It’s likely that judicial decisions on Howey will inform the legislative and regulatory process, Robinett said. And once new regulations and statutes are in place, courts will continue to review those issues and refine “how any new regulatory framework will be applied to particular assets,” she said.

The new framework should assess “what kind of regulation is sufficient and appropriate, so as not to completely stifle innovation and progress with respect to these types of assets—but balancing it with protecting investors, because there is still fraud in all of these areas,” she said.

Less protection could result in “behavior that becomes harmful to investors” or market-weakening crypto “oversaturation,” said Ormsbee. That’s what plaintiffs’ attorneys are keeping an eye on, she said.