Crypto market maker defiant after SEC complaint

"We are not making any changes to our business," Cumberland said in a statement posted to X.

• "We have proven before our firm's willingness to defend ourselves against overzealous regulators wielding their power in ways that harm rather than benefit the market."
• Flashback: DRW drew a complaint over 10 years ago from the U.S. commodities markets regulator, the CFTC, for trades it made in the interest-rate swaps market in 2011. It was dismissed by the court in 2018.

Catch up fast: The SEC Thursday charged Cumberland with operating as an unregistered dealer, saying some of the crypto assets it buys and sells as a market maker are "offered and sold as securities."

• Cumberland is arguing that point, saying it is confident "in our disciplined adherence to all known rules and regulations."
• It claims that the SEC would not let it use a registered broker dealer that it acquired in 2019 to deal in any crypto assets besides bitcoin and ether, and argued it "wasn't long ago" that ether, too, was claimed to be a security.

The other side: "Despite frequent protestations by the industry that sales of crypto assets are all akin to sales of commodities, our complaint alleges that Cumberland ... treated the offer and sale of the crypto assets at issue in this case as investments in securities," Jorge G. Tenreiro, from the SEC's Crypto Assets and Cyber Unit, said in a statement.

Specifically, the agency identified five different assets purchased or sold by Cumberland as securities transactions.

• Those were Polygon's POL, Cosmos' ATOM, Solana's SOL, Algorand's ALGO and Filecoin's FIL. It referred to it as a "non-exhaustive list."
• Notably, those named are all coins rather than tokens, because they are the fundamental assets that create an economic incentive for distributed participants to operate a given blockchain.
• These assets have all been included in other complaints by the agency.

The intrigue: In June, the New York Department of Financial Services awarded Cumberland with it's difficult to attain BitLicense.

• It's interesting because New York and D.C. have tended to march in lock-step on crypto assets in recent years. For example, it dramatically shrunk the list of assets it was OK with last year, as D.C.'s pressure against the industry ratcheted up.

Context: Cumberland is a traditional market maker. It enters a market to support liquidity, but only when and if there's a real counterparty.

• Everything we've heard about Cumberland over the years has been positive. Industry sources have described it as a firm with a good reputation and one that takes compliance seriously.
• Notably, nothing in the SEC's complaint Thursday alleges fraudulent behavior.

💭 My thought bubble: Yesterday, in a joint action with the Department of Justice, the SEC went after four much different types of crypto market makers.

• The firms in yesterday's complaint were charged with fraud, alleged to have engaged in "wash trading" — a scheme where they effectively sold assets to themselves, manipulating the market by making it look like assets had demand.

The big picture: The Cumberland complaint is being viewed by industry participants as an escalation of the SEC's campaign against the blockchain industry, which so far has seen lawsuits against some of the biggest platforms in the industry.

• Coinbase, the crypto exchange, which is currently in court against the SEC, has been credited with inspiring other companies to challenge the SEC's complaints, as Cumberland has promised to do.
• "You don't have to take the SEC's view as gospel," the firm's chief lawyer, Paul Grewal, told Axios in an interview at the Permissionless III conference in Salt Lake City.

What we're watching: According to the SEC's complaint, Cumberland has generated $400 million revenue and $27 million in profits from its crypto asset business, making it one of the largest providers of liquidity in the industry.

• The SEC is demanding that it quit trading securities without registration and disgorging what it calls "ill-gotten gains."