LEJILEX and the Crypto Freedom Alliance of Texas Sue the SEC; A New Nonprofit Aims to Shield White-Hat Hackers in Crypto Industry

LEJILEX and the Crypto Freedom Alliance of Texas Sue the SEC 

What happened?

Last Wednesday, LEJILEX and the Crypto Freedom Alliance of Texas sued the Securities and Exchange Commission (SEC), asking the court to declare that sales of digital assets on Legit.Exchange are not securities transactions and therefore, LEJILEX is not required to register with the SEC as an exchange, broker, or clearing house. This is the first time a pre-enforcement action has been filed against the SEC by a crypto industry participant, which could set precedent regarding the agency's jurisdiction over the digital asset industry. 

The lawsuit contests the SEC’s pattern of “ad hoc enforcement actions” against defendants involved in digital asset transactions. The plaintiffs assert that most digital assets are not themselves “investment contracts” or securities, nor are sales of digital assets, and defining them as such would threaten “law-abiding participants in the digital asset industry with an imminent risk of being subjected to SEC enforcement actions for failing to comply with the SEC’s exaggerated understanding of its own authority.” 

The plaintiffs asked the court to: (1) declare that secondary market sales of digital assets are not sales of “securities;” (2) rule that LEJILEX does not need to register with the SEC; and (3) block the SEC from bringing any enforcement action against LEJILEX or similar entities for acting as unregistered brokers, exchanges, or cleaning agencies. 

The SEC has 60 days from LEJILEX’s filing to respond to the brief. DEF will provide updates as the matter develops. 

For more information, please see DEF’s blog post.

Security Alliance, a New Nonprofit Aims to Shield White-Hat Hackers in Crypto Industry

What happened? 

Samczsun, a pseudonymous cybersecurity researcher at Paradigm (a digital asset investment firm), has initiated a movement to protect white-hat hackers through the establishment of the nonprofit Security Alliance. The organization has received over $1 million in donations from notable entities like Andreessen Horowitz’s (a16z) crypto division, Electric Capital, Paradigm, and the Ethereum Foundation, with Ethereum’s co-founder, Vitalik Buterin contributing $500,000. 

White-hat hackers, who often prefer anonymity due to fears of retaliation from criminal elements, systematically scan project codes for vulnerabilities and report issues to developers, sometimes in exchange for rewards. The creation of the Security Alliance addresses the critical gap in legal protections for these well-intentioned hackers. The 2022 Nomad protocol exploit is an example of what can happen when that gap is significant: during this attack on the protocol, the lack of a supportive legal framework led to many white-hat hackers choosing not to intervene for fear of there being legal repercussions. Unfortunately, $200 million was stolen, which could have been mitigated with white-hat hacker involvement.

Central to the Security Alliance’s mission is the White-Hat Safe Harbor Agreement, which proposes to offer a legal framework that both incentivizes and protects cybersecurity researchers in scenarios similar to the Nomad hack. Furthermore, the agreement underscores the importance of ethical conduct and responsible disclosure by white-hat hackers. Specifically, it sets out guidelines that protect the security and integrity of the protocols the hackers aim to help. However, while the agreement covers the actions of protocols and users, it does not cover the actions of government or regulatory entities. In other words, it does not provide white-hat hackers with immunity from criminal or regulatory liabilities that could arise from participating. 

What does this mean? 

The Security Alliance and White-Hat Safe Harbor Agreement aim to legally protect and motivate cybersecurity experts, potentially saving millions from hacks. The Security Alliance’s research indicates that 60% of hacks between 2020 and 2023 could have fallen under the proposed Safe Harbor Agreement, suggesting the potential impact of this initiative in preventing financial losses from cyber attacks is significant. This initiative also suggests that the unique nature of the crypto industry, with its rapid technological advancements, poses a challenge to traditional regulatory approaches. By setting up this legal framework, the Security Alliance is emphasizing the importance of cybersecurity and taking definitive steps to allow white-hat hackers to contribute during emergencies without worrying about legal consequences. This proactive approach to cybersecurity in the crypto industry may prevent future thefts but also encourage the reporting of security weaknesses, leading to more secure crypto projects and platforms.