As the U.S. Securities and Exchange Commission (SEC) advances its efforts to regulate cryptocurrency, the agency's enforcement actions have created a significant paper trail across the industry. Both entities issuing coins and exchanges facilitating their trade are increasingly receiving Wells notices. On Wednesday, the prominent NFT marketplace OpenSea disclosed that it had received one as well. Before taking formal legal action, the SEC often sends a Wells notice to targets of an investigation. This document details alleged violations of securities laws and provides the entity an opportunity to respond. Last year, the term "Wells notice" gained prominence as the SEC intensified enforcement actions following the collapse of the prominent crypto exchange FTX. For instance, before suing Coinbase, the SEC sent a Wells notice concerning the company’s asset listings and staking services. Since then, the list of organizations targeted by the SEC has expanded. In response to OpenSea’s revelation, Coinbase CEO Brian Armstrong expressed support on Twitter (now X), congratulating OpenSea's co-founder and CEO Devin Finzer and welcoming them to the "club" of companies that have received Wells notices.
It’s important to note that a Wells notice does not guarantee imminent enforcement action. Instead, it means the SEC’s Division of Enforcement will propose a course of action to the Commission, which will then be considered and voted on by its members. This year, the SEC has prepared to sue firms like the decentralized exchange Uniswap and the trading platform Robinhood, although formal charges have yet to be filed. Both companies have publicly responded to their Wells notices. According to The Harvard Law School Forum on Corporate Governance, 46 Wells notices last year led to crypto-related enforcement actions, marking a 53% increase from the previous year. Under SEC Chair Gary Gensler, the Division of Enforcement’s Cyber Unit was renamed in 2022 to include “Crypto Assets” in its title and expanded to 50 full-time staff. The Division has identified key areas for investigation, including digital asset offerings, exchanges, lending and staking products, DeFi platforms, NFTs, and stablecoins. An SEC spokesperson referred Decrypt to a 2023 speech by Gensler, where he highlighted concerns about token issuers, crypto intermediaries, and lending and staking services.
Last month, SEC Director of the Division of Enforcement Gurbir Grewal described some enforcement actions as straightforward, targeting clear frauds such as Ponzi schemes and scams. However, the Division also investigates complex issues like unstable stablecoins, non-decentralized DeFi protocols, and manipulable smart contracts. Grewal emphasized that while the SEC values blockchain innovation, it must also address potential risks and harms, ensuring that activities comply with federal securities laws.
