SEC Cracks Down on Market Makers! Accuses Cumberland DRW of Operating as Unregistered Securities Dealers, Promoting Specific Coins

The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against Cumberland DRW LLC, accusing the company of operating as an unregistered securities dealer, in violation of federal securities laws. This marks the SEC expanding its enforcement actions beyond exchanges, virtual currency/NFT issuers, DeFi developers, to market makers in the trading sector.

SEC Charges Cumberland DRW Summary

The SEC's complaint focuses on Cumberland's activities since March 2018. According to the complaint, Cumberland has been actively trading over $2 billion in cryptocurrency assets, which the SEC considers to be securities. The SEC asserts that Cumberland's trading activities meet the definition of a securities dealer, and therefore should be registered as such under the 1934 Securities Exchange Act. The SEC alleges that Cumberland's unregistered actions have allowed it to profit significantly without adhering to regulatory norms that protect investors.

Cryptocurrency Market Maker Business Model

Cumberland positions itself as a key player in the cryptocurrency market, claiming to be one of the "world's leading providers of cryptocurrency asset liquidity." The SEC's complaint notes that Cumberland provides quotes to counterparties and maintains a larger spread between buying and selling prices. Cumberland profits from the spread between buying and selling prices or from closing trades with value appreciation.

Market Maker Advertising Practices also Under Scrutiny

The SEC's complaint also highlights Cumberland's role in promoting specific cryptocurrency assets.

Cumberland has a team of research analysts and client managers responsible for generating and disseminating reports on the cryptocurrency market and specific cryptocurrency assets. According to the SEC, these reports present certain cryptocurrency assets as potential investment opportunities. The company's analysis often focuses on potential technological advancements and future success of projects, such as improved blockchain transaction speeds, reduced transaction costs, or the introduction of new blockchain technologies.

The SEC believes that these research activities have aided Cumberland's business model as a securities dealer, as the company promotes these assets to potential investors without obtaining the necessary dealer registration.

SEC Seeks to Halt Cumberland's Operations

The SEC's charges are primarily based on Section 15(a) of the 1934 Securities Exchange Act, which requires any entity acting as a securities dealer to register with the SEC or meet exemption conditions. The SEC alleges that Cumberland engaged in trading activities without registration, violating the legal framework that ensures transparency and protects investors. The SEC has requested the following relief from the court:

1. Permanently enjoin Cumberland to prevent further violations of Section 15(a).
2. Order Cumberland to disgorge all improper profits obtained through unregistered trading activities and pay accrued interest prior to judgment.
3. Impose civil penalties on Cumberland under Section 21(d)(3) of the Exchange Act.
4. Any other relief the court deems appropriate.

Significant Impact on Cryptocurrency Market Makers, Specific Coins

This case is a continuation of the SEC's strong enforcement actions within the cryptocurrency industry. The regulatory body is intensifying scrutiny on cryptocurrency entities within its jurisdiction, such as digital assets deemed to be securities. If successful, this could have implications for other unregistered cryptocurrency firms and set a precedent for similar enforcement actions in the future.