The U.S. Securities and Exchange Commission (SEC) has filed legal action against Cumberland DRW LLC, alleging that the company violated federal securities laws by conducting business as an unregistered securities dealer. This is a case in which the SEC, after enforcing laws against exchanges, virtual currency/NFT issuers, DeFi development companies and other industries, then extended its reach to the key players in the transaction – market makers.
Summary of SEC Charges against Cumberland DRW
The SEC’s complaint focuses on Cumberland’s activities since March 2018. According to the complaint, Cumberland continued to actively buy and sell more than $2 billion in crypto assets that the SEC considered to be securities. The SEC argued that Cumberland's trading activities met the definition of a securities dealer and therefore should be registered as a securities dealer under the Securities Exchange Act of 1934. The SEC believes that Cumberland’s unregistered conduct allowed it to make substantial profits without complying with regulatory requirements for investor protection.
Crypto Market Maker Business Model
Cumberland positions itself as an important player in the crypto market, claiming to be one of the “world’s leading crypto asset liquidity providers.” The SEC complaint alleges that Cumberland provided quotes to counterparties and maintained large spreads between bid and ask prices. Cumberland earns profits from the bid-ask spread, or from closing trades that increase in value.
Market makers’ advertising and marketing practices also suffered
The SEC’s complaint also highlights Cumberland’s role in promoting certain crypto assets.
Cumberland has a team of research analysts and account managers responsible for generating and publishing reports on the crypto market and specific crypto assets. According to the SEC, these reports present certain cryptoassets as potential investment opportunities. The company's analysis often focuses on potential technological advancements and future success of projects, such as improvements in blockchain transaction speeds, reduced transaction fees or the introduction of new blockchain technologies.
The SEC argued that these research activities aided Cumberland’s business model as a dealer in securities because the company promoted these assets to potential investors without obtaining required dealer registration.
SEC calls for Cumberland to cease operations
The SEC's charges are based primarily on Section 15(a) of the Securities Exchange Act of 1934, which requires any entity that acts as a dealer in securities to register with the SEC or qualify for an exemption. The SEC alleged that Cumberland engaged in trading activities without registration, violating legal frameworks that ensure transparency and protect investors. The SEC asked the court for the following ruling:
1. A permanent injunction against Cumberland to prevent further breaches of Article 15(a). 2. Order Cumberland to return all improper profits made through unregistered trading activities and to pay interest accrued prior to judgment. 3. A civil penalty imposed on Cumberland pursuant to Section 21(d)(3) of the Exchange Act. 4. Any other relief deemed appropriate by the court.
Significant impact on crypto market makers and specific currencies
This case is a continuation of the SEC’s aggressive enforcement efforts within the crypto industry. The regulator has stepped up scrutiny of crypto entities involved in its jurisdiction, such as trading digital assets considered securities. If the SEC prevails, it could have implications for other unregistered crypto companies, setting a precedent for similar enforcement actions in the future.
This article SEC takes action against market makers! Accusing Cumberland DRW of engaging in unregistered securities dealers and promoting specific currencies first appeared on Chain News ABMedia.