Author: Nancy, PANews

Following the accusations against market makers like Gotbit by U.S. regulators, Cumberland DRW has also been sued by the U.S. SEC. In response to the SEC's regulatory crackdown, Cumberland DRW has stated that it will not change its business operations and is prepared to defend itself once again.

Accusations of Operating as an Unregistered Securities Dealer, Earning Over $27 Million in Profits

On October 11, the SEC announced charges against Cumberland DRW LLC, based in Chicago, claiming that since March 2018, it has operated as an unregistered securities dealer by trading at least $2 billion in crypto assets for its own account, which were issued and sold as securities. At the same time, Cumberland earned millions of dollars in illegal profits through trading with investors, depriving them and the market of the protections provided by federal securities law registration requirements.

The lawsuit states that Cumberland has aggressively promoted its prominence and importance in the crypto asset space, including publicly claiming to be a "global leader in crypto asset liquidity provision." Since March 2018, Cumberland has conducted trades with counterparties via phone and its online trading platform Marea, allowing over 1,500 high-net-worth individuals and entities to join. Cumberland provided counterparties with buy and sell quotes for crypto assets that were issued and sold as securities. The SEC also cited five tokens—MATIC (POL), SOL, ATOM, ALGO, and FIL—as examples of securities sold.

The SEC further pointed out that there is often a significant spread between buy and sell quotes, profiting through earning the bid-ask spread (or difference) or closing positions from value increases. According to the SEC, Cumberland generated over $400 million in revenue and over $27 million in profits from its crypto trading activities.

Additionally, the SEC emphasized Cumberland's promotion of crypto assets. The documents noted that Cumberland has a team of research analysts and relationship managers who primarily publish research reports on the crypto industry and certain crypto assets issued and sold as securities, sometimes implying that these values may increase. Cumberland described these crypto assets to counterparties as potentially favorable investment opportunities for the success of future crypto asset projects.

Moreover, the lawsuit claims that Cumberland also managed risks, captured spreads, or sought arbitrage opportunities by executing various proprietary trading strategies on third-party trading platforms, including accounts opened on crypto asset trading platforms such as Binance.com, Binance.US, Bittrex, Coinbase, Kraken, and Poloniex.

"Federal securities law requires all dealers in securities to register with the Commission, and dealers operating in the crypto asset market are no exception," stated Jorge G. Tenreiro, acting head of the SEC's crypto assets and cyber unit.

The SEC believes that Cumberland's trading activities without registration violate the legal framework designed to ensure transparency and protect investors, and it has requested the court to impose a permanent injunction against Cumberland, return all improper profits obtained through unregistered trading activities, and pay pre-judgment accumulated interest and civil penalties.

Cumberland Accuses SEC of Stifling Innovation, Will Not Change Business Operations

"Cumberland has become the latest target of the SEC's enforcement priorities, which stifle innovation and hinder legitimate companies' participation in the digital asset space. At a recent hearing, the SEC was labeled a 'rogue agency' for failing to cooperate with Congress and was criticized for abusing its power," Cumberland responded promptly.

Cumberland further pointed out that over the past five years, it has had extensive discussions with the SEC on this issue and provided dozens of written summaries and statements along with thousands of pages of materials. To meet the SEC's requirements, it even acquired a registered securities broker-dealer in 2019, only to be told afterward that it could only trade BTC or ETH, which are "commodities" not under SEC jurisdiction. Based on the SEC's actions, Cumberland will not make any changes to its business operations or the assets it provides liquidity for.

The court's accusations against DRW are "merely based on a 'the Earth is flat' type of conviction." This time, the SEC's approach seems to be a game of "Catch-22," where the ability to "come in and register" is just a mirage. Cumberland is ready to defend itself once again.

In response to the SEC's regulatory actions against crypto market makers, crypto KOL @qinbafrank stated, "U.S. regulators are increasingly focused on the crypto industry, from initially regulating stablecoins and trading platforms to suing well-known projects, and now broadly accusing market makers. This only indicates that the gray area will become smaller, and more projects that previously thought they were small and unnoticed will increasingly attract the attention of judicial authorities. Moreover, as market makers are the key lifeline for small coin liquidity, does engaging in market making for small coins amount to pulling the rug out from under them?"

"The current SEC regulatory system is like a parasite, draining the interests of honest operators trying to establish practical application scenarios for cryptocurrencies. We will view it as a stain on the history of American technological innovation. Fortunately, the SEC seems to be provoking some battles that will ultimately fail, which makes me optimistic," said @0xLilShah, former head of partnerships at Scroll.

Cody Carbone, Chief Policy Officer of the crypto advocacy organization The Digital Chamber, believes that this regulatory action is yet another instance of the SEC overstepping its authority and lacking integrity. What the crypto industry needs is clear rules, not enforcement through headlines, which is essential for the industry's prosperity.

Moreover, possibly influenced by this news, Bitcoin once led a general decline in the crypto market. According to CoinGecko, in the past 24 hours, Bitcoin's price briefly fell below the $60,000 mark to $58,000.

In fact, prior to this, due to the intensified crackdown by U.S. regulatory agencies on the crypto industry, market makers Jane Street and Jump Trading both announced their exit from the U.S. crypto trading market. Given the recent lawsuits against Cumberland and others by regulatory agencies, it appears that crypto market makers will face stricter compliance requirements in the future.

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