Crypto Assets – What Are The Limits of SEC Jurisdiction?
The question of jurisdiction regarding crypto assets as to the SEC has been surrounded with controversy since inception. Many, such as the Commission for a time, believed the agency had jurisdiction based on the Howey test regarding what constitutes a security, handed down by the Supreme Court decades ago. Others either rejected this theory or ignored it, concluding the agency has no jurisdiction in the area.
The controversy continued when the Commission recently an action tied to crypto assets. While recent actions in the area by the agency did not specifically state that the Commission was exiting the area, many believed that was the new message. Last week, however, the Commission at lease renewed questions regarding that issue by settling another crypto asset case – if it lacks jurisdiction with regard to the assets, then what is its basis for setting an enforcement case tied to crypto assets? See SEC v. CLS Global FZC LLC, Civil Action No. 1:24-cv-124 (D. Mass.), a previously filed action.
On April 7, 2025, the agency approved a settlement in this action which imposed permanent injunctions against Defendant, based on Securities Act Section 17(a)(1) and (3) and Exchange Act Section 10(b) and Rule 10b-5. In addition, Defendant, an alleged crypto exchange, was directed to pay a penalty of $425,000, disgorgement of $3,000 and prejudgment interest of $80.39. Finally, Defendant was directed to comply with certain undertakings which included an obligation to “take reasonable step as necessary to ensure that CLS Global’s clients are not U.S. persons or entities,” according to the SEC’s press release.
The SEC’s complaint alleged that Defendant engaged in a scheme to induce investors to purchase crypto assets “by creating the false appearance of an active trading market.” While the agency can limit its exercise of jurisdiction to the proper limits, it seems questionable at best that it can at the same time impose remedies like those used here if it is not exercising jurisdiction. See Lit. Rel. No. 26287 (April 17, 2025).