SEC Doubles Down On Crypto Tokens Comprising Securities In Cumberland Complaint

Cumberland DRW, a cryptocurrency market maker, is the latest firm facing legal action from the U.S. Securities and Exchange Commission (SEC).

On Oct. 10, the SEC filed a complaint alleging that Cumberland violated the Securities Exchange Act of 1934 by failing to register as a securities dealer.

The agency argues that Cumberland sold more than $2 billion worth of cryptocurrencies that the SEC deems to comprise securities since March 2018, including Solana (SOL), Polygon (MATIC), Filecoin (FIL), Cosmos (ATOM), and Algorand (ALGO).

The SEC estimated Cumberland has generated $400 million in revenue and $27 million in profits from its crypto business. The agency seeks to restrain Cumberland from continuing its trading activities and seeking the “disgorgement of all illicit trading profits" alongside civil monetary penalties.

Cumberland hits back

Cumberland acknowledged the complaint on social media, criticizing the SEC for operating in bad faith during past discussions between the two entities. Cumberland said it registered as a broker-dealer in 2019 after being encouraged to “come in and register” by the SEC.

“Only then… were we told we could only use our broker-dealer to trade BTC or ETH (both commodities and not under the jurisdiction of the SEC,” the company said on X (formerly Twitter). “This naturally calls into question whether the guidance to come in and register provided in good faith.”

Cumberland stressed that it won’t change its business operations in response to the SEC’s legal action and plans to defend itself in court. "We're ready to defend ourselves again,” Cumberland added.

The firm previously faced a lawsuit from the Commodity Futures Trading Commission (CFTC) in 2011 — which was then headed by the current SEC chair, Gary Gensler — over interest-rate swap trades. The case waa dismissed by a U.S. court in 2018.

Cumberland is not the only crypto firm to push back against the SEC’s enforcement approach.

On Oct.8, Crypto.com took legal action against the SEC after receiving a Wells Notice, which informs a firm that the SEC has completed an investigation into alleged securities law violations.

Coinbase also sued the SEC demanding the agency provide clear regulatory guidelines one month after receiving a Wells Notice in March 2023.

Crypto asset securities

The complaint comes despite the SEC’s claim that cryptocurrency tokens comprise securities facing increasing pushback from U.S. courts.

In July 2023, Judge Analisa Torres, the judge presiding over the SEC’s lawsuit against Ripple, ruled that cryptocurrencies do not inherently comprise securities assets, even when primarily distributed through securities investment contracts.

The ruling has since been cited as precedent, with Judge Amy Berman Jackson referencing Torres’ determination in dismissing SEC allegations that sales of Binance’s BNB and BUSD tokens comprised unregistered digital asset securities in June.

In July, the SEC amended its lawsuit against Binance to drop claims that Binance sold securities, with the agency previously alleging that SOL, MATIC, FIL, ATOM, and ALGO were unregistered securities assets.

Last month, the SEC added a memorandum to the complaint expressing regret regarding its prior use of the term “crypto asset securities," claiming that the term was not intended to describe “the crypto asset itself as the security.”

“While helpful as a shorthand reference, the security in this case is not simply the [crypto asset], which is little more than alphanumeric cryptographic sequence,” the SEC said. “The SEC’s allegations… in secondary markets are that that their promotions and economic realities have not changed in any meaningful way under Howey, such that they continue to be offered and sold as investment contracts.”