Texas Crypto Alliance and Lejilex File Landmark Suit Against SEC

In addition to being sued by the CFAT and Lejilex, the SEC also had to bid farewell to one of its valued attorneys who joined White & Case, a law firm known for defending crypto projects.

There have been a few quite interesting legal updates in the cryptocurrency space over the past few days. The Crypto Freedom Alliance of Texas and Lejilex have started legal action against the SEC, looking for a judicial declaration to clarify the regulatory status of secondary-market digital asset sales and ensure their upcoming platform, Legit.Exchange, is not considered an unregistered securities exchange.

Meanwhile, former SEC attorney Ladan Stewart joins White & Case, bringing insider knowledge to the defense of crypto companies. Additionally, Sam Bankman-Fried waived his right to conflict-free representation in court as his sentencing approaches.

The Crypto Freedom Alliance of Texas (CFAT) and digital asset company Lejilex have started legal action against the United States Securities and Exchange Commission (SEC). Filed in the Northern Texas District Court in Fort Worth on Feb. 21, the lawsuit seeks a judicial declaration on the status of digital assets sold on the secondary market. This move comes as Lejilex is preparing to launch its cryptocurrency exchange, Legit.Exchange. Mike Wawszczak, the co-founder of Lejilex and an attorney, is also the general counsel of Alliance DAO.

The lawsuit targets the SEC with a single count, leveraging the Declaratory Judgment Act and referencing a 2007 case as precedent. The plaintiffs are requesting the court to clarify that secondary-market sales of digital assets, like those intended to be facilitated by Legit.Exchange, do not constitute securities sales as per the definitions in the Exchange Act of 1934 and the Securities Act of 1933. Furthermore, they seek confirmation that operating Legit.Exchange would not render Lejilex as an unregistered securities exchange, broker, or clearing agency.

At the very heart of the dispute is the SEC's recent approach to digital assets, which the plaintiffs argue, unjustly classifies almost all digital asset transactions as 'investment contracts' under federal securities laws. This stance has placed a big cloud of legal uncertainty over the digital asset industry, with concerns about potential SEC enforcement actions for non-compliance with what is seen as an overreach of the SEC's regulatory authority. Despite calls for clarity, the SEC has not issued explicit regulations that would outline its position on digital assets, leaving the industry in a state of limbo.

Lejilex's planned platform, Legit.Exchange, is described as a noncustodial digital asset trading platform that employs smart contracts to enable anonymous user-to-user trading. Lejilex would oversee asset tradability and perform verification tasks for a fee without taking custody of user assets. The company has announced plans to launch the exchange by year-end.

Founded in 2023, Lejilex and CFAT, which was also established in September, are backed by some big names in the crypto and venture capital sectors, including a16z crypto, Coinbase, Ledger, Bain Capital Crypto, Blockchain Capital, and Paradigm.

SEC Attorney Switches Sides

In other legal news, Ladan Stewart, a former attorney for the SEC who played a key role in the enforcement case against Ripple, has transitioned to a private law firm well known for defending crypto companies. On Feb. 21, White & Case announced Stewart's joining as a partner in New York. Stewart, who led the SEC's specialized crypto and cyber litigation unit, brings very valuable insights into regulatory scrutiny within the crypto industry, making her a very valuable asset to White & Case.

Joel Cohen, the head of White & Case's global white-collar practice, also pointed out Stewart's unique positioning to advise and defend crypto industry players against regulatory or private actions. The law firm has a history of representing various crypto firms in high profile cases, including acting as provisional liquidators for FTX after its dramatic collapse and representing Celsius' official creditor committee.

Nicole Erb, a partner at White & Case, suggested that Stewart's deep understanding of the SEC's enforcement strategies would greatly benefit clients under commission scrutiny.

Stewart herself believes that her government experience will provide valuable expertise to the private sector, especially for companies trying to navigate the very complex and still unclear regulatory landscape of crypto and fintech. Despite potential concerns over conflicts of interest, Stewart is confident in managing them, drawing on her experience in litigating high-profile cases against entities like Ripple, FTX's Sam Bankman-Fried, and Coinbase during her eight-year tenure at the SEC's enforcement division.

Sam Bankman-Fried Back in Court

Meanwhile, former FTX CEO Sam Bankman-Fried (SBF) made another courtroom appearance recently, which was one of his first public sightings since his conviction. During the session, he waived his right to conflict-free legal representation, allowing attorneys Marc Mukasey and Torrey Young to represent both him and former Celsius CEO Alex Mashinsky, despite potential conflicts of interest. Mashinsky decided to make the same call in a prior hearing.

The legal developments occurred in the United States District Court for the Southern District of New York, where SBF faces serious consequences after his November 2023 conviction on seven felony counts. Notably, this court appearance allowed the public a rare glimpse of SBF outside of incarceration, after his conviction. Previously, the ex-FTX head maintained a very low profile, with limited information about his life behind bars until recently surfaced photos depicted him among other inmates.

The courtroom developments also included a change in SBF’s legal team. While Mukasey and Young will continue their representation, attorneys Christian Everdell and Mark Cohen, who defended SBF during his October 2023 criminal trial, are set to withdraw. Bankman-Fried is slated for sentencing by Judge Lewis Kaplan on Mar. 28.

SBF's tenure at FTX ended in November of 2022 when the company declared bankruptcy, leading to his arrest and subsequent extradition from the Bahamas to the U.S. He faced charges primarily for fraudulent activities connected to the misuse of funds between FTX and Alameda Research.

Despite the anticipation of additional felony charges in March, recent reports indicate that prosecutors might not pursue a second trial. The defense is expected to present their sentencing recommendations by the end of February.