Do digital assets fall under federal securities laws

A threshold question in many cryptocurrency investigations is whether digital assets qualify as securities under federal securities laws. If yes, then they are subject to a full suite of federal securities regulationss. If not, they may still be subject to AML and other DOJ currency regulations, as well as the authority of the Commodity Futures Trading Commission (CFTC) to pursue manipulation. in the commodity spot market. In the absence of uniform legislation providing guidance on this issue, regulators and courts have generally applied the Howey test to determine whether the digital assets in question are investment contracts and therefore securities. Decisions handed down in contentious cases this year can serve as a catalyst for driving legislative action that provides further guidance to industry.

For example, the result of the The SEC’s ongoing case against Ripple Labs Inc. will be based on whether the XRP digital asset is a security. The SEC alleges that Ripple has raised over $1.3 billion in an unregistered securities offering of XRP, while Ripple claims that XRP is a fully functional currency. The resolution of the main disputes between the parties is expected this year. The result can either embolden the SEC in the cryptocurrency space or provide the industry with ammunition to push back the SEC’s relatively unbroken winning streak in initial coin offering cases.

Meanwhile, the SEC and a group of state AGs recently secured a major settlement against a major crypto lending platform regarding his interest-bearing crypto accounts, on the theory that the accounts themselves were unregistered securities and the entity was an unregistered investment company. the The SEC also proposed regulatory changes this seem to draw the definition of a “stock exchange” broad enough to cover those who create protocols for decentralized exchanges to facilitate crypto trading.

Separately, a Connecticut jury recently found that various cryptocurrency-related products offered by a crypto mining operation were not securities, despite the SEC previously indicting and settling securities fraud claims. securities against the company. Among these products were a virtual currency called paycoin and “hashlets”, units of computing power allegedly intended for the mining of cryptocurrencies. While the case may have had unique facts, the November 2021 civil jury verdict serves as a reminder that a fact-finding investigator does not necessarily agree with the prevailing regulatory sentiment that virtually all crypto offerings are titles.

Federal legislation has the potential to draw clearer definitions, such as November 2021 Infrastructure Investment and Employment Act demonstrates that Congress is taking steps toward formal regulation of cryptocurrency. The law expands the Internal Revenue Code’s definition of “cash” to include “digital assets” for purposes of tax reporting requirements for certain transactions, and defines “digital assets” as “any digital representation of value that is recorded on a distributed medium secured by encryption”. ledger or similar technology.

In a recent report, the Study on the Facilitation of Money Laundering and Terrorism Financing through the Art Trade (, the Treasury Department has suggested that NFTs (non-fungible tokens) could be considered “virtual assets” subject to regulation by FinCEN and other regulators under AML laws. The Treasury noted that the qualification of NFTs as virtual assets depends on the “nature and characteristics” of the NFT. NFTs that are “unique rather than interchangeable” and “practically used as collectibles rather than instruments of payment or investment” would not be considered virtual assets, while NFTs or other digital assets that are “used for payment or investment in practice” can be considered virtual assets. Therefore, the issuers and other service providers of these NFTs may be considered payment processors subject to the Bank Secrecy Act and related anti-money laundering regulations.

The CFTC has also signaled its desire to issue regulations and bring enforcement cases in the crypto space, with CFTC Chairman Rostin Behnam directly asking Congress for more authority over the cryptocurrency markets. cash. In recent remarks to the Senate Agriculture, Nutrition and Forestry Committee, Behnam argued that there should be increased transparency in the underlying cash markets for digital asset products and that the CFTC needs additional tools to bring the crypto market “in the spotlight,” such as increased reporting, order visibility, and new rules around execution, custody, clearing, and settlement.

Time will tell if Congress will provide further regulatory guidance in the crypto space.

Dorothy Murray, Joshua M. Newville, Todd J. Ohlms, Seetha Ramachandran, Jonathan M. Weiss, Julia Alonzo, Julia M. Ansanelli, James Anderson, William D. Dalsen, Adam L. Deming, Reut N. Samuels, and Hena M. Vora also contributed to this article.

© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 60