Cumberland DRW LLC, a market maker that hosts high-net-worth individuals as counterparties, has been sued by the SEC for listing billions of dollars of “crypto assets offered and sold as securities” without registering as a broker-dealer.

By this, the SEC means cryptocurrencies whose value is so bundled to managerial efforts that they amount to investment contracts under the Howey test.

In this case, the SEC contends that those efforts were tied to Cumberland’s promises that the purchase of listed coins would “provide lower blockchain transaction fees and higher speeds, new forms of blockchain technology, or more efficient storage networks,” which in turn would cause the price of the coin to swell.

This argument alludes to how some coins tend to be “hyped up” early on by influencers, who are often quick to exit their positions before the coin’s development stagnates and prices wither.

Boosting stakes

According to the SEC’s complaint, Cumberland acted as its own influencer by publishing reports to investors from its research teams. The company also profited from its boosting, as it often held stakes in the crypto it traded.

Cumberland has publicly denied the SEC’s accusations, claiming that it initially registered as a broker-dealer to offer only fully decentralized coins such as bitcoin and ether under the SEC’s insistence, but was given no further guidance.

The company also accused the SEC of overreach and flip-flopping, underscoring that the agency has argued that even decentralized coins that lack promotional frameworks are securities.

Crypto market regulation

The SEC has been ramping up enforcement against “unregistered crypto securities,” tokens that are tied to promotion and therefore under the SEC’s regulatory ambit according to the four-pronged Howey test.

In recent years, the SEC has set its sights on online crypto marketplaces for failing to register as broker-dealers in offering those cryptocurrencies.  The agency is currently embroiled in court battles with online crypto marketplaces like Coinbase for failing to register under Exchange Act Section 15(a).

However, the action against Cumberland marks the first time that the SEC has gone after a single-dealer OTC crypto trading firm for failing to register as a broker-dealer.

Unlike the other platforms, Cumberland typically works only with sophisticated, high net-worth individuals and institutions, rather than the general public. Cumberland in turn provides deep liquidity for large volumes of high-speed crypto transactions.

Pattern of enforcement

SEC Chair Gary Gensler has long been an advocate for the stringent regulation of cryptocurrencies as securities, which has seen him butting heads against the developers of certain tokens whose status has yet to be clearly defined under Howey, such as stablecoins.

Indeed, this pattern of enforcement goes beyond legitimate market makers and platforms and into the realm of bona-fide financial crime. Last week the SEC went after several firms posing as “market makers” that actually were in the business of simulating legitimate market activity for cryptocurrency developers.

By taking advantage of bot-fueled wash trading, those firms were able to pump certain coins’ value, and then dump them off on unsuspecting buyers, the SEC stated.

Owing to a parallel DOJ investigation, those promoters are now facing decades in prison and millions in fines.