Crypto Investment Firm Paradigm Challenges SEC’s Jurisdiction in Bittrex Lawsuit

Prominent crypto investment firm Paradigm has challenged the US Securities and Exchange Commission‘s authority to regulate secondary markets for crypto assets.

The company has filed an amicus brief in the SEC’s case against cryptocurrency exchange Bittrex, challenging the regulator’s attempt to expand its jurisdiction over crypto secondary markets, Paradigm’s special counsel Rodrigo Seira said in a recent statement.

In the legal document submitted to the court, Paradigm argued that the SEC’s claims against Bittrex and other crypto exchanges are fundamentally different from its previous cases against token sellers.

While the SEC previously sought to regulate fundraising schemes under the Howey test, Paradigm noted that the agency is now attempting to extend its authority to include downstream sales of crypto assets. 

“The SEC’s lawsuit against Bittrex is the first of three cases that the SEC has brought in rapid succession against crypto exchanges,” Seira wrote in the blog post.

As reported, last month, the SEC sued both Binance, the world’s largest cryptocurrency exchange, and Coinbase, the largest US-based cryptocurrency exchange. 

“Through these actions, the SEC is wrongfully attempting to lay claim over crypto secondary markets.”

. @paradigm filed an amicus brief in SEC vs. Bittrex that rejects @SECGov unsupported attempt to expand its jurisdiction over crypto secondary marketshttps://t.co/o8VTXyK4Ow

— Rodrigo (@RSSH273) July 10, 2023

Bittrex, a Seattle-based exchange, announced in early April that it would wind down US operations due to the challenging regulatory and economic environment in the country. 

Shortly after, the SEC charged Bittrex, its co-founder and former CEO William Shihara, and its foreign affiliate Bittrex Global for operating an unregistered national securities exchange, broker, and clearing agency. 

The agency claimed that Bittrex had facilitated the buying and selling of crypto assets since at least 2014, earning at least $1.3 billion in revenues from transaction fees.

Less than a month after the SEC’s complaint against Bittrex US, the platform filed for bankruptcy in a federal court in Delaware in early May.

In the announcement, the exchange noted that the bankruptcy filing would not impact Bittrex Global, which serves customers outside the United States. The exchange will continue operations “as normal” for customers outside the US. 

Paradigm Accuses SEC of Inconsistent Stance on Crypto Regulation

Paradigm, which previously filed a similar amicus brief in support of Coinbase, criticized SEC Chair Gary Gensler for his inconsistent stance on regulating secondary markets. 

Paradigm argued that Gensler himself admitted that the agency lacked the authority to regulate these markets in 2021. 

However, the SEC is now asserting that it possesses the authority and is seeking retroactive penalties against companies that have not complied.

The investment firm also contended that even if a cryptocurrency asset was initially sold in an ICO, the SEC has no legal basis to argue that the asset itself constitutes an investment contract. 

“In the last six years, the SEC has pursued dozens of enforcement actions against persons who have sold crypto assets as part of their fundraising efforts, and courts have agreed that some of those sales were ‘investment contract’ offerings under the Howey test,” the company said in the court filing.

According to Paradigm, the few courts that have examined the distinction between token offerings and tokens in secondary markets have all recognized that the Howey test does not apply to transactions between third parties. 

The firm concluded that the SEC’s theories as unprecedented and urged the court to dismiss the case against Bittrex.