The U.S. Securities and Exchange Commission and Commodity Futures Trading Commission published interpretive guidance explaining how they might define what constitutes a security in crypto. The CFTC issued a no-action letter for a non-custodial wallet provider to facilitate derivatives and prediction markets transactions. Arizona is filing criminal charges against a prediction market provider, and there are hints of movement on market structure legislation.
The SEC laid out several categories it saw in the crypto space, with one category being digital securities. These are cryptocurrencies that meet the definition of a security under any other context, but happen to be tokenized, the guidance said.
For example, if a crypto asset meets the prongs of the Howey Test, it’s a security. This is the category of tokens the SEC will oversee.
Other categories include payment stablecoins, digital tools, digital collectibles and digital commodities. These are generally not securities unless the issuers or operators take actions that might meet securities regulations, such as fractionalizing the tokens in question.
We establish a straightforward taxonomy of crypto assets — most of which are not securities — and clarify how the Supreme Court’s Howey test applies when a crypto asset is part of an investment contract.
The CFTC said it would sign on to the guidance and administer it under the Commodities Exchange Act. Market participants — from innovators and issuers to individual investors — should review this interpretation to better understand the regulatory jurisdiction between the SEC and CFTC. The interpretation will be published on CFTC.gov and in the Federal Register.
Congressman Troy Downing called the guidance “very positive,” but said Congress still needed to pass market structure legislation as a future administration could undo the interpretative guidance. It’s a great start because this is exactly what the industry wants, and it allows some people to move forward. Chris LaVigne, a partner at the law firm Withers, said the guidance “predictably concludes that most crypto assets and many common crypto activities are not securities,” though the agency kept some discretion to being an enforcement action in this area.
The guidance moves the securities inquiry away from the asset or activity itself (which are mostly deemed digital commodities not within the purview of the SEC) and re-centers the analysis on the transactions and representations in which these assets or activities arise or are marketed. By doing so, the SEC did not completely eliminate uncertainty or its enforcement role, because it concludes that a crypto asset that is not a security can nonetheless be sold as part of an investment contract if it is marketed with promises of profit derived from the issuer’s essential managerial efforts. A crypto that was marketed as a security may eventually be deemed something else once those promises are fulfilled or no longer operative; this might affect securities more broadly than just crypto assets.
It’s less clear what may constitute a commodity under the guidance. Jason Gottlieb said the Commodity Exchange Act defines commodities as a list of products (excluding onions and motion picture box office receipts), services and other issues in which contracts for future delivery are presently or in the future dealt in; this legal definition diverges from the definition seemingly being used in the guidance. The CFTC’s approach to crypto over the past decade has evolved since some early lawsuits, where it claimed jurisdiction over bitcoin, leading it to seemingly have jurisdiction over non-security cryptocurrencies. This definition needs to be codified by market structure legislation, he told CoinDesk.
People need to understand that jurisdiction is still uncertain. The SEC is clearly saying we don’t have jurisdiction if the token does not meet these criteria, he said. Just because the SEC does not have jurisdiction does not mean the CFTC does. Gottlieb said he was part of a case before the Seventh Circuit Court of Appeals seeking to gain clarity on this question, but market structure legislation would be needed to cleanly grant the CFTC jurisdiction over all non-security cryptocurrencies. The status of that legislation also remains up in the air.
Senator Cynthia Lummis said she anticipated a markup may happen in the final weeks of April. The issue of stablecoin yield may be resolved with an agreement that stablecoin issuers and their partner firms would not describe their products using bank terminology, though she cautioned that she hadn’t seen any specific language yet. The flip side, several individuals told me, is that the Clarity Act might require the SEC to go back to the drawing board on how it’s defining securities in crypto.
Senator Tim Scott said lawmakers are also close to agreements on issues like ethics and quorums on the regulatory agencies — some of the outstanding areas of disagreement on the bill. Downing said the market structure bill needed to address consumer protections and money laundering, without being so restrictive that companies would be scared to do anything. Nobody wants bad actors in their space and nobody wants that reputation of bad actors using this as a tool to do bad things. If you bring those provisions in too narrow, nobody’s going to do anything innovative.
Late Friday, Senators Angela Alsobrooks and Thom Tillis told Politico they had reached an agreement on the yield issue, though the details had not been shared with the banking or crypto industries as of press time.
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