The Securities and Exchange Commission (SEC) filed a lawsuit Thursday against Cumberland DRW, the cryptocurrency arm of high-speed trading firm DRW Holdings. The lawsuit accuses Cumberland of violating securities laws by failing to register as a securities dealer, marking a significant escalation in the SEC’s ongoing crackdown on crypto firms, as Cumberland primarily trades with hedge funds and large institutional investors rather than ordinary consumers.

The lawsuit, filed in Chicago federal court, alleges that Cumberland DRW profited by trading unregistered securities with investors, depriving the market of key protections under federal securities laws. The SEC is seeking to fine the firm and force it to return profits earned through these trades, which reportedly amounted to $400 million in revenue and $27 million in profit since 2018.

“Cumberland has reaped millions of dollars in ill-gotten gains by trading with investors while depriving them of the protections of the federal securities laws,” the SEC said in its complaint.

In response, DRW vowed to contest the charges, calling the lawsuit “frustrating and disappointing” and criticizing the SEC’s approach of prioritizing enforcement over regulation. The firm noted that it has taken steps to comply with the law, including acquiring a registered broker-dealer in 2019, although it was only allowed to trade bitcoin and ether through that entity.

The SEC’s lawsuit against Cumberland DRW is part of its effort to bring cryptocurrency markets under traditional securities regulations. Under Chair Gary Gensler, the SEC has taken a firm stance that many digital assets qualify as securities, which should be subject to the same oversight as stocks and bonds. This position has led to high-profile lawsuits against major cryptocurrency exchanges like Coinbase and Binance, which are also resisting the agency's attempts to regulate them under existing securities laws.

Cumberland DRW operates an over-the-counter (OTC) trading desk, a key player in the crypto ecosystem, facilitating large trades of digital assets such as Solana, Algorand, and Filecoin with hedge funds and other institutional clients. This case is notable because it marks the SEC’s first major action against an OTC crypto trading firm, broadening its enforcement beyond exchanges that cater to retail investors.

The lawsuit is another chapter in the longstanding clash between DRW founder Donald Wilson Jr. and regulatory agencies. In 2013, the Commodity Futures Trading Commission (CFTC), which Gensler previously chaired, accused DRW of market manipulation. DRW fought the charges in court and won in 2018, a victory that may influence how the firm approaches this new SEC lawsuit.

The outcome of this case could have far-reaching consequences for how the crypto industry operates in the U.S., particularly for institutional investors and OTC trading firms. If the SEC prevails, it could further solidify its jurisdiction over a wider swath of the crypto market, forcing more firms to register as securities dealers and comply with investor protection laws.

The lawsuit also raises questions about the future of cryptocurrency regulation in the U.S. With former President Donald Trump expressing support for crypto and his potential return to office, the SEC’s current enforcement strategy could face a reversal depending on the outcome of the 2024 presidential election.

Cumberland DRW’s case is just one in a series of legal battles that could shape the future of the crypto industry, and with major exchanges like Coinbase and Binance also fighting the SEC in court, the legal landscape for cryptocurrency remains highly uncertain.The SEC's lawsuit seeks financial penalties and the return of profits earned through the alleged violations. DRW Holdings plans to vigorously defend itself in court, setting the stage for another protracted legal fight over the agency's reach into the cryptocurrency industry.