Paradigm: SEC Exceeds Statutory Jurisdiction, Bittrex Case Should Be Dismissed

Key Points:

• Paradigm argues that the SEC lacks authority to regulate the secondary market for crypto assets because they are not securities transactions.
• No court has ruled that assets in an investment contract or their subsequent transfers in the secondary market are securities transactions, making the SEC’s premise unique.
• Paradigm has supported both Coinbase and Bittrex in their legal battles against the SEC, emphasizing the differences between these cases and previous ones involving token sellers.

The crypto investment company Paradigm has filed an amicus brief in the US Securities and Exchange Commission’s (SEC) lawsuit against the exchange Bittrex, alleging that the US SEC has the authority to regulate the secondary market for crypto assets since they do not contain “investment contracts.”

As a result, securities transactions that do not fit within the agency’s scope feel that the case should be dismissed. Furthermore, a purported exhaustive review of every federal appellate case dealing with the Howey issue confirms that no court has ever ruled that an asset the subject of a transaction in an investment contract is a security in and of itself or that a subsequent transfer of that asset in the secondary market is a security transaction. As a result, the SEC’s premise is wholly novel.

“The SEC lacks the authority to regulate secondary markets for crypto assets because they do not involve ‘investment contracts’ and are therefore not securities transactions under the agency’s remit,” Paradigm stated in a blog post.

In April, the SEC sued Bittrex Inc. and its former CEO, William Shihara, for running an unregistered securities exchange, broker, and clearing agency. According to the SEC’s complaint, which was filed in a U.S. district court in Washington, Shihara coordinated with crypto asset issuers seeking to make their tokens available for trading on Bittrex’s platform to delete public statements that Shihara believed would lead regulators to investigate those token offerings as securities. Two weeks later, Bittrex declared bankruptcy.

The action was the first of three filed by the SEC against cryptocurrency exchanges in recent weeks. The regulator has also charged Coinbase and Binance.

“The SEC’s claims against Bittrex and the other crypto exchanges are fundamentally different from its many prior cases against token sellers. In those prior cases, the SEC exercised its authority to regulate fundraising schemes under the Howey test,” Paradigm’s special counsel Rodrigo Seira stated in a tweet.

The petition marks the second time Paradigm has supported an exchange facing SEC legal action. Paradigm submitted an amicus brief in May, soon after the SEC sued Coinbase, saying that the SEC had offered inadequate guidelines for crypto companies.

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