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SEC Seeks Dismissal of DEBT Box Crypto Lawsuit to Avoid Sanctions

2 mins
Updated by Kyle Baird
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In Brief

  • The SEC is facing sanctions from a federal judge and is seeking to dismiss a lawsuit against a crypto firm to avoid potential disciplinary actions.
  • Ripple Labs' CTO has criticized the SEC's actions in the DEBT Box case, highlighting the profound impact on defendants and their families.
  • Ripple's and DEBT Box's battles with the SEC signal ongoing high-profile crypto litigation and potential rulemaking changes in 2024.
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The US Securities and Exchange Commission (SEC) has moved to dismiss its lawsuit against crypto firm DEBT Box in a bid to sidestep sanctions from a federal judge. This decision comes amidst growing scrutiny over the SEC’s handling of crypto-related cases, particularly under the leadership of Chair Gary Gensler.

The case initially accused DEBT Box of defrauding investors of nearly $50 million. It has been a focal point in the ongoing debate about the regulatory environment surrounding cryptocurrencies.

SEC Throws in Towel in DEBT Box Suit

The SEC initially sued DEBT Box in July 2023 for offering what it referred to as “node licenses” as unregistered securities since 2021.

DEBT Box node license explainer. Source: DEBT Box

The SEC’s request for dismissal without prejudice, allowing for the possibility of a future retrial, is a clear indicator of the agency’s attempts to avoid potential disciplinary actions. This move is not without its critics.

Ripple Labs’ CTO David Schwarz and crypto lawyer John Deaton have vocally criticized the SEC’s actions in this case. Their statements underscore the profound impact on the defendants and their families.

Deaton called out the agency for its handling of the case:

“The impact of gross government overreach can’t be overstated. And the lawyers …claim this was not intentional. @SECEnfDirector has already misled Congress. These lawyers were following SEC leadership.”

Read more: What Does It Mean To Receive a Wells Notice From the SEC?

His concerns echo the sentiments of many in the crypto community, who view the SEC’s approach as overly aggressive and detrimental to the industry’s growth.

The DEBT Box case is particularly notable for the SEC’s use of an ex parte application. This tactic effectively barred the firm from contesting the action in court.

The defendants later refuted the SEC’s claims, casting doubt on the agency’s allegations and leading Judge Robert Shelby to demand the SEC justify its initial actions.

Shelby stated concerns about the SEC’s statement, saying the agency made,

“Materially false and misleading representations.”

A Slippery Slope

In a December filing, the SEC’s enforcement chief, Gurbir Grewal, admitted to the agency’s missteps.

The Commission cannot let its zeal to stop ongoing fraud interfere with its duty to be accurate and candid. The Commission and its attorneys fell short of that expectation here.

This admission, coupled with the agency’s inability to provide proof of overseas transfers, paints a picture of an organization grappling with the complexities of regulating the crypto sector.

The SEC’s handling of the DEBT Box case and its implications extend beyond the immediate parties involved. It underscores the broader challenges facing regulatory bodies in governing the cryptocurrency market.

With high-profile cases like DEBT Box and Ripple still in play and the SEC’s rulemaking agenda for 2024 poised to impact the industry further, crypto regulations remain in a state of flux.

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Kyle Baird
Kyle migrated from the East Coast USA to South-East Asia after graduating from Pennsylvania's East Stroudsburg University with a Bachelor of Science degree in 2010. Following in the footsteps of his grandfather, Kyle got his start buying stocks and precious metals in his teens. This sparked his interest in learning and writing about cryptocurrencies. He started as a copywriter for Bitcoinist in 2016 before taking on an editor's role at BeInCrypto at the beginning of 2018.