By Terry Weiss and Alek Smolij
Crypto.com, one of the world’s largest cryptocurrency trading platforms which claims to have over 100 million users, announced this week an acquisition of Watchdog Capital, LLC, an SEC-registered broker dealer with the capability to trade traditional securities. The move is significant because while there has been a deliberate expansion into crypto by some traditional securities firms (whether it be allowing the trading of crypto ETFs or direct ownership in more limited cases), this move is interesting for another reason: on one hand Crypto.com will expect to need the regulatory support from the SEC as it undertakes this expansion, but at the same time it is suing the SEC, contending that the regulator has overstepped its authority in the crypto space.
Crypto.com already has made a big splash with an aggressive promotional campaign that includes the naming rights to the Los Angeles Lakers stadium and ad time during the Super Bowl. It has already made efforts to make trading crypto easier for users worldwide, including a 2024 partnership with Standard Chartered that expanded the platform’s capability for users to deposit fiat currency and convert it into crypto.
Watchdog Capital is a Portsmouth, New Hampshire based broker-dealer that touts its experience with Bitcoin, blockchain, and fintech companies on its website. Currently, it appears that Watchdog Capital only offers securities pursuant to various SEC exemptions including Section 4(a)(2) private placements and Regulation Crowdfunding offerings. Prior to the Crypto.com acquisition, Watchdog Capital appears to have targeted accredited and high net worth investors in lieu of traditional retail.
Crypto.com’s press release regarding the acquisition, however, details larger plans for Watchdog Capital’s platform. Crypto.com states that it is “aggressively working towards integrating traditional financial tools with digital financial capabilities,” and that the acquisition “will offer users in the U.S. the ability to engage with stocks and options markets.” And, Watchdog’s website indicates that it is hiring FINRA Series 7 licensed customer service representatives, potentially indicating that it is staffing up to anticipate heightened interest with Crypto.com throwing some of its substantial marketing budget behind the new acquisition. Perhaps Crypto.com wants to become a one-stop shop to invest in both crypto markets and traditional equity markets. However, it is unclear what type of equities Crypto.com plans to offer through Watchdog’s broker dealer platform and whether, at some point, a Crypto.com investor could purchase a share of Ford stock and a fraction of bitcoin on the same platform.
Crypto.com’s acquisition of Watchdog Capital and plan to offer traditional equities comes shortly after Crypto.com filed a lawsuit in early October 2024 against the SEC immediately after the SEC issued a Wells notice. The action, captioned Foris DAX Inc. d/b/a Crypto.com v. Securities and Exchange Commission, et al., is currently pending in the United States District Court for the Eastern District of Texas. The civil lawsuit seeks declaratory and injunctive relief to, as Crypto.com puts it, “prevent the Securities and Exchange Commission…from unlawfully expanding its jurisdiction to cover secondary-market sales of certain network tokens sold on Crypto.com’s platform.” The complaint details the history of the SEC’s attitude towards digital crypto assets and alleges that under current Chair Gary Gensler, the SEC has unilaterally sought to regulate crypto assets (other than Bitcoin and Ethereum) under the category of “Crypto Asset Securities.” The lawsuit notes that the SEC’s history of aggressive litigation towards crypto companies and “invention” of the concept of Crypto Asset Securities are both unfair and unlawful.
The SEC has not yet answered Crypto.com’s lawsuit.
Crypto.com’s lawsuit is the latest in a series of preemptive lawsuits filed by crypto actors against the SEC alleging that the SEC is overstepping its legal authority in its crypto regulation. Many of these lawsuits have been filed in federal court in Texas. While the crypto actors in these lawsuits have not stated their reason for filing these suits in Texas, it is likely that they are attempting to take advantage of potentially favorable Fifth Circuit precedent. In Jarkesy v. SEC, the Fifth Circuit concluded that the SEC’s in-house administrative enforcement proceedings were unconstitutional. Additionally, other decisions by Fifth Circuit courts have been characterized as being friendly to businesses and unfriendly to administrative agencies like the SEC.
Crypto.com’s Texas lawsuit puts it at odds with the SEC and makes clear that Crypto.com disagrees with the SEC’s authority to regulate crypto assets. It has publicized the lawsuit against the SEC as attempting to “protect the future of the crypto industry in the U.S…against a misguided federal agency acting beyond its authorization under the law,” according to a press release publicizing the lawsuit. The company will have to square this approach with its decision to offer traditional equities, which are clearly within the SEC’s regulatory jurisdiction and will require Crypto.com to cooperate with the SEC in order to successfully offer equities products. Additionally, crypto actors should follow how Crypto.com integrates equity offerings into its platform and whether it offers investors just the ability to invest in fintech-forward equities or plans to offer the ability to purchase stock in large, publicly traded companies through Watchdog’s broker-dealer platform. One thing is clear: Crypto.com’s move into the traditional equities space is another step towards bringing crypto assets in front of retail investors.