How the Celsius Affair Plays Into the U.S. Crypto Regulatory Debate

By July 15, 2023 In Celsius, Law, Ripple

The dramatic arrest of Celsius founder Alex Mashinsky on Thursday adds extra fuel to an already fiery debate over how to treat crypto – and whether 100-year–old laws are sufficient to regulate the likes of Binance and Coinbase.

The action by multiple federal regulators comes as the Securities and Exchange Commission’s alleged authority over crypto comes under judicial pressure, and lawmakers and regulators fight over what new legislation, if any, is needed for the sector.

Mashinsky, who was Celsius’ Chief Executive Officer until September after it filed for bankruptcy one year ago today, has pleaded not guilty to charges including wire fraud and securities fraud, and to manipulating the price of Celsius’ token CEL; his lawyers have told CoinDesk he “vehemently denies” the allegations.

The news came on the same day that a New York court ruled partially in favor of Ripple, saying that the XRP token wasn’t an investment contract when sold algorithmically on exchanges, and hence doesn’t fall under securities law.


That in turn could have implications for a suite of cases which the SEC has taken against Coinbase (COIN), Binance and Bittrex, arguing that they should have registered because tokens traded on those platforms, such as solana (SOL), polygon (MATIC) and cardano (ADA), fall under its purview.

It also comes in the week that lawmakers in Congress sought to again rejig laws to fit digital assets, with a bipartisan bill from Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) focused on giving extra crypto powers to the Commodity Futures Trading Commission (CFTC).


Mashinsky has previously sought to distinguish its own case from that of Ripple, saying that CEL was registered with the SEC. In reality, he appears to have sought an exemption from registration by arguing the token was only used by accredited, financially knowledgeable investors.

That’s not the only difference between the cases. Ripple is formally separate from XRP, but Mashinsky may not have been so careful about links to his own token. According to the SEC filing, “Mashinsky wrote in an internal message that he wanted ‘to be able to talk about CEL just like public companies talk about their stock.’” It alleges that, after Celsius, Mashinsky was the second largest holder of CEL.

The SEC appears to concede a distinction between Celsius and other cases. It says Celsius offered and sold CEL as a security, but doesn’t explicitly say whether the token was correctly registered or exempted. Celsius is taken to task for failing to register another of its offerings, the Earn Interest Program – under which the company offered rates as high as 17% to investors tendering their crypto, which the SEC also says is a security.

CoinDesk has reached out to the SEC for comment on the status of CEL, but did not immediately receive a response.

New laws?

The SEC has stressed that existing rules designed to protect investors, many of which date back to the 1930s, already apply to crypto companies like Celsius.

“The misconduct here is yet another example of the need for crypto market participants to come into compliance with our securities laws,” which would have implied proper disclosures and routine inspections by regulators, the agency’s Enforcement Director Gurbir Grewal told reporters on Thursday.

That’s an unsurprising stance for the SEC to take: its ongoing legal cases hinge on it asserting that current laws are clear and that Binance, Bittrex, Coinbase and Ripple aren’t complying.

Rival officials put a different emphasis.

The CFTC believes large-scale cryptocurrencies like bitcoin (BTC), ether (ETH), USDC and tether are commodities under U.S. law, and has said both Mashinksy and Celsius should have been registered in connection with commodity pool operations. But CFTC officials are less satisfied with the legal status quo, and say the Celsius affair just underlines the need for change.

“I am glad that the Commission [CFTC] has the ability to go after fraud after the fact,” CFTC Commissioner Kristin N. Johnson said in a Thursday statement, but added that “the lack of a clear regulatory framework for digital assets allowed this fraud to flourish.”

“Customers and the public would be better served by a comprehensive regulatory regime that could prevent frauds like this one from developing in the first place,” said Johnson reiterating her call for a “a clear and robust regulatory regime for digital assets …. in light of yet another example of its necessity.”

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