How Impact Litigation is Shaping Crypto Policy: Lejilex Takes on the SEC

The Texas-based cryptocurrency company's recent legal action demonstrates the industry's ability to utilize impact litigation to obtain regulatory clarity, according to lawyers Jake Chervinsky and Amanda Tuminelli.

Crypto Takes Legal Offensive in Lejilex vs. SEC Case

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It’s no secret that the relationship between the crypto industry and the U.S. Securities and Exchange Commission (SEC) is frosty at best. The SEC’s stance on crypto has evolved over time, starting with an attitude of benign neglect in Bitcoin’s early days. However, during the ICO boom of 2016-17, the SEC began taking an interest in the space, enforcing regulations and providing some guidance. In recent years, though, the SEC has become increasingly hostile towards crypto, viewing the majority of crypto transactions as securities violations.

This antagonistic approach has left the crypto industry in a tight spot. Many builders are reluctant to operate in the United States due to the fear of facing an SEC enforcement action. Even those who invest heavily in legal representation still feel the chilling effect of the SEC’s presence, as the cost of defending against an enforcement action can be crippling for a young company. Thus, many crypto businesses are left feeling like sitting ducks, hoping the SEC will turn its attention elsewhere.

But this week, the tide turned as the industry went on the offensive.

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Lejilex Steps Up Against the SEC

A new crypto trading platform called Lejilex filed a lawsuit against the SEC in a federal court in Texas, together with the Crypto Freedom Alliance of Texas, its trade association. In the lawsuit, Lejilex argues that secondary market sales of digital assets should not be considered securities transactions and, therefore, fall outside the SEC’s jurisdiction. This argument closely aligns with Coinbase’s current stance in its enforcement action in New York.

The Lejilex lawsuit is a prime example of “impact litigation,” where strategic lawsuits are brought to court to present well-considered legal questions, aiming for long-term effects that go beyond the specific case. Impact litigation has been used effectively in the past, notably during the civil rights movement, to expand individual liberties and equal protection. It has also been used recently to challenge unjustified regulations by interpreting statutes strictly.

The Judiciary as a Catalyst for Change

Although we typically look to the legislative and executive branches of government to shape policies, the judiciary has played a crucial role in molding law to serve public policy goals and benefit society. Impact litigation allows individuals and organizations to bring key questions of national significance to the courts, leveraging the interpretive tools available to judges. This approach becomes particularly useful when the executive branch misinterprets the law, the legislative branch moves too slowly to correct the situation, and the judiciary has the capacity to get it right.

All three conditions are undeniably true for the crypto industry. The SEC’s misinterpretation of how existing laws apply to digital assets, coupled with the slow progress of new legislation specific to crypto, presents an opportunity for the courts to step in. By employing interpretive tools like the major questions doctrine, judges can strike down regulations that lack clear congressional authorization.

A Strong Track Record in Court

Crypto industry’s performance in the courtroom provides additional reasons to pursue impact litigation. Ripple Labs, for example, emerged victorious last year when Judge Torres ruled that secondary sales of XRP were not securities transactions. Similarly, Uniswap Labs obtained a thoughtful opinion from Judge Failla, who will also decide the Coinbase case, delineating liability based on the nature of smart contracts. Moreover, a panel of three circuit judges overturned a decade of SEC precedent, clearing the way for the approval of spot bitcoin ETFs.

However, it’s important to note that impact litigation is a blunt tool for shaping policy. It is a slow, expensive, and unpredictable process. If the crypto industry had the option to choose between compliance and a court battle to the death, compliance would undoubtedly be the preferred path. Unfortunately, the SEC’s adversarial stance leaves the industry with limited options: flee, fail, or fight. For Lejilex, fighting through impact litigation seems to be the chosen course, and they may not be the last.

With impact litigation gaining momentum, the crypto industry should closely monitor the outcome of such cases. The courtroom battles could have far-reaching implications for crypto policy and regulation. It’s a complex situation, but the industry’s willingness to confront the SEC head-on demonstrates its determination to secure a favorable legal landscape for crypto.

Q&A: Addressing Additional Reader Concerns

Q: What other crypto companies have engaged in impact litigation against the SEC?

A: While Lejilex’s lawsuit against the SEC is gaining attention, Coinbase is another notable player engaged in impact litigation. Coinbase is challenging the SEC’s enforcement action in federal court in New York, arguing against the agency’s interpretation of securities laws in relation to crypto. These cases, along with others, serve as important battlegrounds for shaping crypto regulation in the United States.

Q: Why is the SEC taking such a hostile stance towards the crypto industry?

A: The SEC’s hostility towards crypto stems from its belief that the securities laws apply to the majority of crypto transactions, considering them violations. They perceive the industry as operating outside the boundaries of existing regulations. Additionally, the SEC’s enforcement actions against prominent crypto companies, like Coinbase and Kraken, indicate their intention to regulate the industry through strong enforcement rather than facilitating compliance.

Q: What are the potential outcomes if impact litigation is successful?

A: If impact litigation against the SEC proves successful, it could have significant implications for the entire crypto industry. It would establish legal precedents that clarify the interpretation of existing laws and define the scope of the SEC’s jurisdiction over digital assets. The outcomes of these cases, along with the potential resolution of new legislation, can play a crucial role in shaping a clear and favorable regulatory landscape for crypto.

The Future of Crypto Regulation

As the crypto industry continues to evolve, policy and regulation will play a critical role in its development. Impact litigation offers a means to challenge misinterpretations of existing laws and influence policy outcomes. While it may be a challenging and prolonged process, the potential rewards for the industry are substantial.

It’s clear that the crypto industry is no longer content to be passive victims of regulatory constraints. By taking the fight to the courts, companies like Lejilex are driving towards a more favorable and balanced crypto regulatory environment. The outcome of these legal battles will ultimately shape the future of the industry.

So, as crypto enthusiasts, let’s keep a close eye on the courtroom drama, cheer for our favorite plaintiffs, and hope for a brighter and more accommodating future for crypto!

References:

1. Lejilex Lawsuit against the SEC
2. Coinbase’s Motion for Judgment on the Pleadings
3. Why Binance, Coinbase, Ripple and Other Crypto Firms Cite the Major Questions Doctrine
4. Coinbase and SEC Dig in With U.S. Judge on Whether Securities Law Applies to Listings
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