The SEC Moves Against A Major Crypto Market Maker

On October 10, 2024, the Securities and Exchange Commission ("SEC") filed a complaint in the U.S. District Court for the Northern District of Illinois, alleging that a major market maker in crypto assets is operating as an unregistered dealer, in violation of Section 15(a) of the Securities Exchange Act of 1934 (the "Exchange Act").¹

The Exchange Act defines a "dealer" in securities as "any person engaged in the business of buying and selling securities … for such person's own account through a broker or otherwise."² The SEC's complaint (the "Complaint") alleges that since at least 2018, the market maker bought and sold, for its own accounts as part of its regular business, at least $2 billion worth of crypto assets that were offered and sold as securities. In support of this, the SEC identifies "a non-exhaustive list of five crypto assets" that were allegedly purchased or sold as investment contracts that are or were traded by the market maker with counterparties as part of its regular business, viz., Polygon, Solana, Cosmos, Algorand and Filecoin.³

The Complaint alleges that since 2018, the market maker had:

• Largely conducted its trading business through its online trading platform, which provides quotes to, and trades on a principal basis with, counterparties.
• Engaged in other proprietary trading, including (i) through "discretionary risk taking" trading, which involves taking a long or short position in various crypto assets; and (ii) by deploying proprietary trading strategies on third-party crypto asset trading platforms, including so-called market-making strategies and strategies to manage the market maker's risk exposure.
• Marketed itself, and acted as, a liquidity provider for certain crypto assets.
• Held itself out as engaged in a regular business of buying and selling for its own account at industry conferences, in various media and to various counterparties, and by allowing other crypto asset-related businesses to display the firm's logo on their websites.

Takeaways

This is not the first time the SEC has alleged that a crypto platform is acting as an unregistered broker-dealer. It has, for example, sued a number of crypto exchanges for allegedly acting as unregistered exchanges, unregistered broker-dealers and an unregistered clearing agency. However, this Complaint marks the first time the SEC has moved against a dedicated market maker, rather than an exchange, for allegedly acting as an unregistered dealer.

The SEC's focus in the Complaint on proprietary trading, the advertisement of market making activities in various media and liquidity provision in respect of one or more crypto assets, all suggest that regulatory scrutiny on firms that are regularly active in trading crypto assets is likely to continue. Firms that hold themselves out as regularly buying or selling, or providing liquidity around one or more crypto assets, or that continuously quote prices for both purchases and sales of crypto assets, may find it helpful to compare the range of their activities against those listed in the Complaint.

The SEC has, however, historically recognized an exception from the dealer definition for "traders," that is, persons who buy and sell securities for their own account, either individually or in a fiduciary capacity, but not as part of a regular business.⁴ Firms whose crypto asset trading activities do not rise to the level of market makers in terms of regularity and /or scale, should consider whether the scope of their activities could allow them to qualify as "traders." In particular, firms that do not advertise, or "hold themselves out" as market makers in crypto assets, firms whose crypto asset trading activities are infrequent or sporadic and firms that do not quote prices for both purchases and sales of crypto assets, may all wish to seek counsel on whether they can legitimately avail themselves of the "trader" exception.