Washington D.C., October 10, 2024 – The Securities and Exchange Commission (SEC) has filed charges against Cumberland DRW LLC, a prominent Chicago-based crypto trading firm, for operating as an unregistered dealer in the crypto asset markets. According to the SEC, Cumberland has engaged in over $2 billion worth of crypto asset trades that were offered and sold as securities, in violation of federal securities laws. The SEC claims that Cumberland's failure to register deprived investors of essential legal protections.

The Allegations

The SEC's complaint reveals that Cumberland has been operating as an unregistered dealer since at least March 2018, engaging in the purchase and sale of crypto assets that should be treated as securities under federal law. Cumberland allegedly carried out these activities as part of its regular business without registering with the SEC, violating the requirements of the Securities Exchange Act of 1934.

The firm, which claims to be "one of the world’s leading liquidity providers" in the crypto market, has been offering liquidity in various digital assets by buying and selling them for its own accounts. According to the SEC, Cumberland’s public-facing operations include 24/7 trading with counterparties through both traditional means, such as telephone, and via its online platform, Marea.

The SEC contends that these crypto assets were offered and sold as investment contracts on third-party crypto exchanges, which further necessitated registration under federal securities law. By failing to register, Cumberland is accused of sidestepping the requirements designed to protect investors from undue risk and ensure transparency in the markets.

Federal Securities Law Requirements

The SEC’s Acting Chief of the Crypto Assets and Cyber Unit (CACU), Jorge G. Tenreiro, emphasized the importance of compliance with registration rules in the rapidly evolving crypto asset market.

He stated, "The federal securities laws require all dealers in all securities to register with the Commission, and those who operate in the crypto asset markets are no exception." Tenreiro added that, despite the industry’s frequent protests that crypto assets are more akin to commodities than securities, the SEC’s complaint makes it clear that the offer and sale of these assets to investors fall under securities regulation. He also noted that Cumberland profited from its activities without registering as a dealer, denying investors the protections afforded by registration.

The SEC's complaint, filed in the U.S. District Court for the Northern District of Illinois, charges Cumberland with violating Section 15(a) of the Securities Exchange Act of 1934. The Commission is seeking several remedies, including:

  • Permanent injunctive relief to prevent Cumberland from continuing its unregistered activities.

  • Disgorgement of all ill-gotten gains, including prejudgment interest.

  • Civil penalties to serve as a deterrent against future violations.

The SEC’s investigation was conducted by the Market Abuse Unit, with significant contributions from Andrew McFall and Kathleen Hitchins, who were supervised by Amy Flaherty Hartman, Paul Kim, and Jorge Tenreiro of the CACU. The litigation will be led by Christopher Martin and Timothy Stockwell, with oversight from Jack Kaufman and Tenreiro.

Industry Implications

This case underscores the SEC's ongoing crackdown on unregistered dealers in the crypto market. In recent years, the Commission has taken an increasingly active stance in regulating crypto assets, which it considers securities in many instances. This has brought heightened scrutiny to firms that trade digital assets, as they are required to comply with the same regulations as traditional securities dealers.

While the crypto industry has long contended that many digital assets are commodities, the SEC has maintained that investment contracts involving digital assets fall under its purview. The regulator’s actions, such as the case against Cumberland, signal a continued effort to bring the crypto markets into compliance with existing federal securities laws.

What’s Next for Cumberland DRW?

The litigation marks a critical moment for Cumberland DRW, one of the major liquidity providers in the global crypto space. The firm faces substantial penalties and could be required to halt its trading activities until it complies with SEC registration requirements.

For other firms operating in the crypto markets, this case serves as a strong reminder that the SEC is vigilant in enforcing the rules around crypto assets, and that failure to register as a dealer in securities can result in significant legal and financial consequences.

Conclusion

The SEC’s charges against Cumberland DRW LLC highlight the ongoing regulatory efforts to ensure that crypto asset markets operate within the framework of federal securities laws. By taking action against unregistered dealers, the SEC aims to protect investors from undue risk and ensure transparency and accountability in these fast-growing markets. This case serves as a clear warning to other crypto firms that operating without proper registration can lead to significant legal and financial penalties. As the crypto industry continues to evolve, compliance with securities regulations will be critical to ensuring its long-term stability and legitimacy in the broader financial ecosystem.

Source: https://www.sec.gov/

Cumberland tweeted the reply to SEC charges on X. The company said that “we are ready to defend ourselves again”.