I gained a reputation as a skeptic when it came to the legality of selling cryptocurrency in the United States. I wrote about this extensively in 2017, when I was studying to earn my master’s degree in law. I had more time to express myself and could say whatever I wanted.

I also held this position even though it was not popular or obvious, unlike recent crypto critics such as former government lawyer John Reed Stark, who seems to delight in knocking the industry down. On July 9th 2014, my friend Tim Swanson was quoted by CoinTelegraph in an article titled ” Mitigating Legal Risks when Issuing Securities to a Cryptoledger “, where I stated that ” [Virtually] no one has done this properly.” To date, I haven’t seen a crypto-security properly structured.



Preston Byrne, an attorney and a partner in Brown Rudnick’s Digital Commerce Group.

The people thought I was insane at the time. Other people probably thought I was a jerk. It’s probably somewhere in between. Remember, however, that the term “initial coins offering” (ICO), which was first used in 2014, did not exist. Entrepreneurs like Joel Dietz marketed their “Swarm ” crowdfunding token as “crypto equity,” a phrase which became unpopular with more sophisticated projects, like Ethereum, which launched its ICO only a few months after I had been quoted in the CoinTelegraph piece. Even that was not called an ICO. This was, according to the advice given by Joe Lubin’s lawyers, a “sale” of crypto fuel for Ethereum. Or, as the New York Attorney general alleged in a recent lawsuit against KuCoin was a security.

Ethereum then exploded in 2017, and along with it, a thousand imitations and other variants. U.S. regulators responded slowly. Bill Hinman, then-SEC director, added fuel to ICO fire with his ” Hinman Speech ” which described the (now-discredited), “sufficiently decentralized ” exception to the Howey Test. Hinman, who was based in San Francisco at the time, was a well-known figure in the venture capitalist community. Many people assumed that he had convinced the SEC that Ethereum – a popular investment – was the next Internet.

Five years on, I believe it’s safe to say that Ethereum still hasn’t solved many of the scaling problems it would need to solve to become the new internet. It is perhaps not surprising, given the broken promises, that the government decided to bring back the status quo with the NYAG’s suit against KuCoin.

Confusion and strange settlements

What happened after the Hinman speech is best described as confusing. The SEC had not been involved in crypto until the Hinman speech. They only got involved when there was a clear and blatant fraud. The first case I can remember was SEC against Trendon Shavers and Bitcoin Savings and Trust, a Ponzi Scheme. SEC against GAW Miners and Joshua Homero Garza and al., another Ponzi Scheme involving “mining contracts”, and a stablecoin of $20 called “paycoin”.

The SEC began its enforcement actions for non-fraud in late 2018 – just months after Hinman’s speech. The SEC announced its first settlement with the founder of an early decentralized exchange or “DEX,” EtherDelta on November 8, 2018. They claimed that DEX operated an unregistered trade, which implied that they believed that EtherDelta’s assets – Ether and ERC-20s — were securities. The SEC announced their first settlements ten days later with two otherwise unremarkable ICOs, Airfox and Paragon . Both respondents agreed to register the tokens as securities.

Bill Hinman issued a non-guidance guideline that was not followed by a number of strange transactions and settlements. EOS for example advertised its product in a Times Square billboard at Consensus 2017, and raised more than $4 billion (as it was valued) in crypto. Yet, they were allowed to pay a $24million fine, and there was no requirement to register.

Some projects weren’t as lucky. Ripple, Telegram and Kik Interactive launched colossal ICOs. Both Telegram and Kik lost in federal court and I don’t rate Ripple. The smaller LBRY project in New Hampshire, which predated EOS by a few years, also was not offered a settlement agreement with the SEC that would have allowed their business to continue.

No surprises

We now come to the Coinbase lawsuit. It will not surprise any lawyer who has practiced in the U.S. since 2018.

There are many charges. The SEC claims that Coinbase violated the Securities Act of 1934 registration requirements in relation to the custodial stake offering.

The Commission also accuses Coinbase of violating the Exchange Act registration requirements. This requires anyone who transacts in securities to be registered and supervised by it. Coinbase has also been charged with acting as a broker-dealer without registration and as a clearing agency without registration, which is “anyone who acts as an intermediate in making payments, deliveries, or both, in connection with securities transactions or…provides facilities for comparison of the terms of settlement in securities transactions.”

I will not bore you with chapter and verse about broker-dealer requirements. I won’t also go into a Howey Analysis of many of the coin mentioned in the complaint – including Solana ADA Matic Filecoin SAND AXS CHZ FLOW ICP NEAR VGX DASH NEXO. It is important to note that the SEC wants a permanent injunction to stop Coinbase from running an unlicensed Exchange. They may be able shut down Coinbase completely if they are able to win the trial and get one of their tokens to work.

It surprised me that it has taken this long. In 2017, I predicted that there would be a day when law enforcement would launch “simultaneous morning raids on the major exchanges as well as the homes and offices the major ICO promoters.” If the SEC goes after Coinbase, then no one at Coinbase is safe. This event, which I called ” the Zombie Marmot Apocalypse“, was a massively negative for crypto. I believe it has now arrived.

What comes next? Crypto will not disappear, so the answer I see is new exchanges without all of this regulatory baggage.

  • There is no better time to launch a crypto exchange today than 2012. Compliance will be cheaper than non-compliance for the first time, perhaps since the beginning of Bitcoin. The existing industry giants are burdened with a large amount of technical-legal debt that they must work through. This will cause them to be distracted and cost them a great deal of money.
  • Crypto will not die. Crypto is not going to die.
  • To regulate Starlink as we do road traffic, it would be like making companies like Coinbase consider crypto tokens old-fashioned securities. It was also unrealistic to expect the U.S. Government to just let crypto take place. The U.S. crypto industry will be able to find a compromise through increased lobbying and a willingness to compromise. This will allow the crypto business in the U.S.to become more regularized within five years, if not earlier.
  • Companies that succeed will have an expansion strategy that excludes the United States. They will need to be prepared to move there on a hair-trigger basis once the regulations become favorable. Or, alternatively, they will need to create a subsidiary like INX that meets all regulatory requirements. I think that regulation will loosen eventually, so that companies such as INX can function more like Coinbase or Gemini. To reach scale, startups must establish a foothold in countries that have a large population of English-speaking crypto-users who don’t prohibit ICOs. They should also allow exchanges to trade crypto spot without being regulated as clearing agencies or broker-dealers.
  • The United Kingdom is the only G20 member that I can think of who meets these criteria. The UK could be used to launch access to English-speaking Africa, and India, while the U.S. tries to get its act together.

So. Crypto is not dead. It just needs a legal update. May the most compliant and best startup win.

Jeanhee Kim is the editor.