Key Takeaways:
The US Securities and Exchange Commission (SEC) has charged crypto market-making firm Cumberland for operating without registration as a dealer in securities transactions of more than $2 billion worth of cryptocurrencies.
This enforcement action is poised to have a significant impact on the crypto market as Cumberland is one of the longest-standing liquidity providers across trading platforms in the industry and the case is different from the ones the agency has brought against fraudsters and market manipulators in the sector.
SEC Charges Market Maker Cumberland For Handling $2B Worth Unregistered Crypto Securities
According to the SEC’s complaint, starting from March 2018 to the present, Cumberland has been allegedly engaging in the purchase and sale of crypto assets that are classified as securities by the SEC for its own accounts without seeking registration. It further states that the company conducts trades around the clock via its Mera platform, routinely trading cryptocurrencies, treated as investment contracts, on external exchanges.
The agency identified five specific crypto assets purchased or sold by Cumberland that are considered investment contracts and thus securities. These include Polygon’s native coin POL, Cosmos’ ATOM, Solana’s SOL, Algorand’s ALGO, and Filecoin’s FIL.
The SEC claims that these cryptocurrencies are coins rather than tokens because they are fundamental assets that create an economic incentive for participants to operate the respective blockchains.
In response to the SEC’s charges, Cumberland argued that it had become the latest target in the agency’s enforcement-first approach to crypto companies in an effort to stifle innovation in the sector. It specifically disputed the Commission’s classification that certain cryptocurrency transactions are considered securities.
The company said it has engaged in five years of good-faith discussions with the SEC on this matter and shared “dozens” of written summaries and statements, produced “thousands” of pages of material, and made its senior management and compliance personnel available for “hours” of interviews. Cumberland noted that this was the first time that the SEC was being specific about the transactions at issue.
Cumberland Alleges SEC Did Not Allow It To Handle Any Crypto Assets Beside BTC And ETH
Cumberland is confident in its “disciplined adherence to all known rules and regulations”. It claims that the financial watchdog would not let it operate a registered broker-dealer that it acquired in 2019 to handle any crypto assets besides Bitcoin (BTC) and Ether (ETH) – both considered commodities and not under its jurisdiction. The company also noted that it wasn’t long ago that the agency considered ETH to also be a security.
The statement also cited the market manipulation charges levied by the Commodity and Futures Trading Commission (CFTC) against Cumberland’s parent firm DRW in November 2013, when current SEC chairman Gary Gensler was serving as the regulatory body’s chief.
The case was closed in December 2018 after a judge ruled that the CFTC failed to prove that DRW manipulated the market in trades it made in the interest-rate swaps market.
The SEC’s case against Cumberland is the latest in a series of enforcement proceedings against major crypto companies, which includes big names like Coinbase, Binance, and Ripple. These legal actions are likely to continue until the SEC establishes a clear regulatory framework for the crypto sector.
The SEC’s acting chief of the Crypto Assets and Cyber Unit, Jorge Tenreiro, stated that the federal securities laws require all securities dealers to register with the Commission, and there was no exception for those who operate in the crypto asset market.
He also addressed the crypto community’s claims that tokens should be treated as commodities, to which he argued that Cumberland’s actions treated the sale and offering of crypto assets as securities, necessitating registration to guarantee investor protection.
The $80M Market Maker Calls the Law For Crypto Companies In the US a “Mirage”
As a result of the violations, the SEC is seeking permanent injunctive relief to halt Cumberland’s activities, the disgorgement of profits the company allegedly gained unlawfully, prejudgement interest, and civil penalties.
Cumberland said the SEC’s latest regulatory action reveals that registering as a broker-dealer for digital assets in the US is “just a mirage”. The company is prepared to fight the lawsuit.
According to data sourced by Arkham Intelligence, Cumberland holds over $81.5 million in various crypto assets. Most of these funds are held in BTC, approximately $44.2 million. The market maker also holds nearly $24 million in ETH, over $12 million divided between USDT and USDC stablecoins, $6.3 million in AAVE, and close to $9 million in cUNI – which are Uniswap (UNI) tokens staked on the crypto money market platform Compound.
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