Bitnomial Exchange Takes on SEC: A Legal Challenge Over Crypto Futures Regulation
R Tamara de Silva
The battle between cryptocurrency exchanges and U.S. regulators intensifies as Bitnomial Exchange sues the U.S. Securities and Exchange Commission (SEC), alleging regulatory overreach. This lawsuit highlights the increasing tensions between regulators and crypto exchanges over the jurisdictional scope of digital asset regulation, with Bitnomial claiming that the SEC is stepping beyond its statutory boundaries.
Bitnomial’s Background and Argument
Bitnomial, is registered as a designated contract market (DCM) with the Commodity Futures Trading Commission (CFTC). A DCM is an exchange for margined and physically deliverable digital asset futures and options. Two of Bitnomial’s affiliates, Bitnomial Clearinghouse, LLC (registered in 2023) and Bitnomial Clearing, LLC (registered in 2022), were approved by the CFTC as a derivatives clearing organization and a futures commission merchant, respectively.
In August 2024, Bitnomial filed a self-certification with the CFTC for listing XRP Futures on its exchange. XRP Futures, are physically settled contracts, that allow market participants to trade XRP, a digital asset, on a future date at a predetermined price.
The SEC asserts that XRP is an investment contract, thereby classifying XRP Futures as security futures, which would subject them to joint jurisdiction between the SEC and CFTC. Bitnomial disagrees with this classification and argues that XRP Futures should fall under the sole jurisdiction of the CFTC as a commodity derivative-a futures contract and not a security futures contract. This is an important difference. Security futures are subject to joint regulatory oversight of the CFTC and the SEC. See 15 U.S.C. § 78c(a)(10); 15 U.S.C. § 77b(a)(1); 7 U.S.C. § 1a(31). Futures on non-security instruments are subject to the exclusive jurisdiction of the CFTC. See 7 U.S.C. § 2(a)(1)(A). Bitnomial contends that XRP should be classified as a non-security future, falling solely within CFTC jurisdiction.
In SEC v. Ripple, (previously covered here), Judge Analisa Torres, ruling on a motion for summary judgment, staed that XRP sales on public exchanges do not constitute the sale of securities under the Howey Test, finding that such secondary market transactions fall outside SEC jurisdiction.
Bitnomial refers to this decision to argue that XRP Futures, traded on a futures exchange, should not be classified as security futures. For Bitnomial, the ability to list XRP Futures without complying with SEC regulations is critical to its business model because the SEC’s actions could call into question its other futures contracts. If the SEC's prevails, Bitnomial may be forced to abandon its plans or register as a national securities exchange, significantly altering its operations.
The crux of Bitnomial's argument is that it cannot comply with the Securities Exchange Act of 1934 (Exchange Act), the U.S. federal law that governs the trading of securities in secondary markets and established the SEC. The Exchange Act requires that, to list a security futures contract, the underlying security must first be registered. XRP, however, is not registered as a security, and Bitnomial, as the exchange operator, does not have the power to register it. As a result, the SEC’s position effectively blocks Bitnomial from listing XRP Futures, even though it is complying with all CFTC regulations.
To resolve this issue, Bitnomial is seeking declaratory relief under the Declaratory Judgment Act. It asks the court to declare that XRP Futures are not security futures and to issue an injunction preventing the SEC from asserting jurisdiction over the contracts or pursuing enforcement actions. Without such relief, Bitnomial faces the risk of having to abandon its plans to list XRP Futures or face penalties for non-compliance with SEC regulations.
Crypto.com’s Lawsuit and Call for Joint Regulatory Clarity
Crypto.com’s lawsuit against the SEC, filed on October 8, 2024, challenges the agency’s authority to classify network tokens, such as SOL and ADA, as securities. Network tokens are digital assets that operate within decentralized blockchain networks, often used to facilitate transactions or provide access to services on that network. Crypto.com argues that the SEC’s actions, including the use of the term "Crypto Asset Securities," are arbitrary and lack a legal foundation. By relying on enforcement rather than formal rulemaking, the SEC, they claim, has overstepped its statutory authority under the Administrative Procedure Act.
Crypto.com has also petitioned for the SEC and CFTC to issue a joint interpretation regarding the regulation of crypto derivatives, requesting that certain derivatives, such as those linked to network tokens, be regulated solely by the CFTC. This request stems from Crypto.com's concerns over jurisdictional conflicts between the two regulators, which, if clarified, would provide much-needed certainty for platforms offering digital asset derivatives, such as those involved in the secondary-market trading of tokens like SOL, ADA, and others.
Why These Cases Matters
Both Bitnomial and Crypto.com’s legal challenges force a conversation that should take place- the need for more regulatory clarity. There also needs to be clarity in the jurisdictional battle between the SEC and the CFTC.
The implications of these suits extend more broadly to multiple tokens and crypto exchanges. If the SEC's view prevails, it could bring more digital asset products under its jurisdiction and push many other outside of the U.S.
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