Crypto, it’s time to demand clarity from the courts

On March 25, 2024, Beba, a small apparel company located in Waco, TX, partnered with the DeFi Education Fund to file a lawsuit against the Securities and Exchange Commission. The suit challenges the SEC’s statements that there may be securities law implications with Beba’s intent to sell duffel bags to people at a discounted price.

No, you did not read that incorrectly.

If your first reaction was to ask “why would the SEC be involved in this at all?,” then your reaction probably lines up with the overwhelming majority of people who are familiar with securities law and/or duffel bags.

Now, let me introduce an additional piece to the puzzle: Beba plans to gatekeep access to the sale, making its duffel bags available exclusively to holders of a specific blockchain token.

This small detail reveals why it is so important that a company like Beba takes this action. The SEC’s actions over the past several years have made the operating environment for crypto native companies attempting to do things the right way nigh-impossible. There is no clear path to compliance. This uncertainty has also empowered the worst actors in the space by removing the usual guard rails that would serve as signals to protect the average investor.

Why? The SEC has failed to write rules for crypto, with the exception of a clear statement that effectively bans US banks from acting as custodians (SAB 121). This means we have an operating environment where there is no good legal framework to determine the good actors from the bad. As a result, the average investor can’t tell FTX from Coinbase. To add to that, the SEC continues to enforce securities laws based on undisclosed and contradictory interpretations, so what is a company that wants to follow the law supposed to do? How is a company supposed to ensure compliance when they don’t know what to comply with?

This brings us back to duffel bags. What Beba intends to do is simple: distribute tokens via blockchain airdrops that would allow recipients to buy its bags at a discount. If this was done via a private wallet app, via the US postal service or just by handing out flyers on the street, it would be uncontroversially clear that this was not a securities offering. However, the direct involvement of blockchain technology introduces ambiguity due to the SEC’s vague regulations, leaving Beba uncertain whether its distribution methodology could inadvertently trigger a securities enforcement action.

To counter this, Beba is doing something that I have suggested for years: Demand clarity from the courts. This is something that I believe is the correct path forward if Congress will not act and the SEC continues with its incoherent, contradictory approach to crypto.

In the end, the United States is a nation governed by laws, where individuals and entities have rights. And at a bare minimum, the SEC needs to obey the law and respect the rights of Americans. In one case already, the SEC was sanctioned by a federal judge for making false claims so egregious about the DEBT Box platform that the regulator was forced to pay the platform’s legal fees. With this in mind, it is completely appropriate for crypto projects to try to move forward by taking their own actions to force the SEC to give both legal clarity and fair treatment.

Read more from our opinion section: Yes, staking actually should be regulated

Given the SEC’s notorious position of silence, Beba’s process of securing a response from the commission becomes more crucial than the actual details of that response. If there is a coherent and clear theory for why this activity does fit neatly within the securities regulatory framework, the SEC should just articulate that so people can act accordingly. Yet, so far they have refused to do so.

Even SEC Commissioners themselves are calling the agency out for the complete disarray they have created for investors and builders, with both Commissioner Hester Pierce and Mark Uyeda including a parody of interactions with the SEC in a dissent that ends as follows:

“FSS [crypto platform]: I’ve read about your enforcement actions. I still have questions.

SEC: Hire a lawyer.

FSS: I did, and the lawyer has even more questions.

SEC: Sorry, we cannot help any more than we already have. We don’t give legal advice.”

Should it be this way? No. The SEC needs to stop obfuscating and obstructing, and instead return to its core job of regulating securities laws effectively. Congress also needs to step in, both to pass legislation to create legal clarity and to rein in the SEC so this conduct cannot expand to other industries.

Finally, when regulators refuse to comply with demands for fair treatment and clarity, and Congress remains unresponsive, the American judicial system stands as a crucial avenue for redress. It’s time the crypto space starts using it effectively.

Austin Campbell is the founder and managing partner of Zero Knowledge Consulting and an adjunct professor at Columbia Business School. Previously, he has run portfolio management at Paxos for the stablecoins as well as being the chief risk officer of Paxos National Trust, has managed fixed income trading desks at JP Morgan and Citi, and has been a portfolio manager and structurer at Stone Ridge, the parent of NYDIG. He holds a BS in Mathematics from CSU Chico and a MBA from NYU Stern.

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