Court Challenge to SEC Crypto Authority

The Crypto Freedom Alliance of Texas (CFAT) and digital asset company Lejilex have taken legal action against the United States Securities and Exchange Commission (SEC), seeking clarity on the classification of digital assets sold on the secondary market. On February 21, CFAT and Lejilex filed a lawsuit against the SEC in the Northern Texas District Court in Fort Worth. Lejilex, which aims to launch the Legit.Exchange crypto exchange, is co-founded by attorney Mike Wawszczak, who is also the general counsel of Alliance DAO.

The suit is based on the Declaratory Judgment Act and references a 2007 case as precedent. The plaintiffs have requested several rulings from the court, including a declaration that secondary-market sales of digital assets, like those Lejilex intends to facilitate through Legit.Exchange, are not securities as defined by the Exchange Act of 1934 and the Securities Act of 1933. They also seek a declaration that Legit.Exchange is not an unregistered securities exchange, and that Lejilex will not be considered an unregistered broker or clearing agency by operating the exchange.

According to the plaintiffs, the SEC’s recent enforcement actions have taken the position that almost all digital asset transactions involve “investment contracts” under federal securities laws. They argue that this threatens law-abiding participants in the digital asset industry with the risk of facing SEC enforcement actions for not complying with the agency’s broad interpretation of its own authority. The plaintiffs highlight that the SEC has not provided any explicit regulation detailing its new position despite requests from industry participants, which would require the agency to go through notice-and-comment rulemaking.

Lejilex describes Legit.Exchange as a noncustodial digital asset trading platform that utilizes smart contracts for peer-to-peer trading. Users remain anonymous to each other, while Lejilex controls the assets that can be traded and performs verification functions in exchange for a fee. It does not hold custody of user assets. The company plans to launch Legit.Exchange by the end of the year. Lejilex was founded in 2023, and CFAT was established in September of the same year. Notable supporters of CFAT include a16z crypto, Coinbase, Ledger, Bain Capital Crypto, Blockchain Capital, and Paradigm.

The lawsuit extensively discusses the Howey test and references the Wahi case, as well as SEC actions against LBRY, Binance, and various others.