SEC Chair Gary Gensler’s Annual Congressional Testimony
On September 12, 2023, Gary Gensler gave his annual testimony to the United States Senate Committee on Banking, Housing and Urban Affairs and then on September 27th to the United States House of Representatives Committee on Financial Services (for a review of last year’s testimony see HERE). Both appearances included the same prepared remarks followed by robust Q&A from the lawmakers.
This year Chair Gensler’s prepared remarks focused on: (i) rule amendments and updates; (ii) improving efficiency in equity markets; (iii) disclosure matters and related enforcement including related to cryptocurrency; and (iv) general updates on the SEC and capital markets.
Prepared Remarks
We shouldn’t expect the busy SEC rule making agenda to slow down any time soon. Chair Gensler prioritizes updating rules for technology, business and market changes. Although Gensler’s speech focuses on rule changes to make the markets more efficient and resilient and lower costs, the reality is that not all rule changes will accomplish
Non-Fungible Tokens
This one has been on my list for a while and I’m finally ready to dive in – non-fungible tokens (NFTs). In July 2017, the world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector, when the SEC issued its Section 21(a) Report on the DAO investigation finding that a cryptocurrency is, in most cases, a security HERE. The SEC’s Section 21(a) Report relied on the analysis in SEC v. W.J. Howey Co. to determine when a crypto is a security, building the guardrails to conclude that all, or almost all, cryptocurrencies at that time were/are indeed a security. For more on the Howey analysis, see HERE.
Later in June 2018, the SEC gave some relief to the crypto world by announcing that Bitcoin and Ether were likely decentralized enough as to no longer be considered a security, hedging on the conclusion as
SEC Cracking Down on The Crypto Wild West and Other Digital Asset Updates
After a few years of relative dormancy, the SEC is once again targeting the flourishing cryptocurrency market. On August 3, 2021, SEC Chair Gary Gensler gave a speech to the Aspen Security Forum in which he referred to the cryptocurrency marketplace as the Wild West. Days later, the SEC filed its first case involving securities using DeFi technology and then a few days after that, reached a $10 million settlement with Poloniex for operating an unregistered digital asset exchange. Shortly after that, the SEC took aim at Coinbase’s planned crypto lending program causing the crypto giant to shelf the business model for the time being. SEC Commissioners are joining in, giving speeches in various forums focused on crypto and the regulatory environment.
Background
In July 2017, the world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector, when the SEC issued its Section 21(a) Report on
Hester Peirce Proposal For Treatment Of Cryptocurrency
SEC Commissioner Hester M. Peirce, nicknamed “Crypto Mom,” has made a proposal for the temporary deregulation of digital assets to advance innovation and allow for unimpeded decentralization of blockchain networks. Ms. Peirce made the proposal in a speech on February 6, 2020.
The world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector with the SEC’s announcement that a cryptocurrency is a security in its Section 21(a) Report on the DAO investigation. Since then, there has been a multitude of enforcement proceedings, repeated disseminations of new guidance and many speeches by some of the top brass at the SEC, each evolving the regulatory landscape. Although I wasn’t focused on digital assets before that, upon reading the DAO report, I wasn’t surprised. It seemed clear to me that the capital raising efforts through cryptocurrencies were investment contracts within the meaning of SEC v.
The SEC, FinCEN And CFTC Issue A Joint Statement On Digital Assets
On October 11, 2019 the SEC, FinCEN and CFTC issued a joint statement on activities involving digital assets. Various agencies have been consistently working together, with overlapping jurisdiction, on matters involving digital assets and distributed ledger technology. Earlier, in August, the SEC and FINRA issued a joint statement on the custody of digital assets, including as it relates to broker-dealers and investment advisors (see HERE).
The purpose of the joint statement is to remind persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA). AML/CFT obligations apply to entities that the BSA defines as “financial institutions,” such as futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN (for more information on MSBs see HERE), and broker-dealers and mutual funds obligated to register
Securities Token Or Not? A Case Study – Part III
This is the third part in my three-part series laying out fact patterns and discussing whether a specific digital asset is a security, a utility, currency, commodity or some other digital asset. In Part 1 of the series, I examined a decentralized token that had been issued without any concurrent capital raise and was able to conclude such token was not a security. Part 1 can be read HERE. In Part 2 I examined a token that was issued with the intent of being a utility token, but as a result of the clear speculative motivation for purchasers, and the lack of decentralization, concluded it was a security. Part 2 can be read HERE.
In this Part 3 of the series, I examine the issuance of the Free Token as a dividend and its cousin the Bounty Token. Unlike the prior blogs in this series, which examined the question of whether a particular token is a security, this blog
Security or Utility Token? A Case Study – Part I
Is it a security or is it a utility, currency, commodity or some other digital asset? That question has been continuously raised by those working with digital assets such as cryptocurrencies, virtual coins and tokens, including by digital asset issuers and companies that run platforms for the issuance or trading of such digital assets. Although the first and easy answer is that if a digital asset is being issued today, it is most assuredly a security upon issuance that needs to comply with the federal securities laws, the answer is not always that straightforward for digital assets that have been in the marketplace for a period of time, such as bitcoin and ether, or for new digital assets that are carefully being constructed to fall outside the purview of a securitized token.
The “STO” standing for security token offering has quickly gained favor alongside “ICO” with an industry-understood distinction. An STO is designed to
FinCEN’S Role In Cryptocurrency Offerings
In the continuing dilemma over determining just what kind of asset a cryptocurrency is, multiple regulators have expressed opinions and differing views on regulations. Likewise, multiple regulators have conducted investigations and initiated enforcement proceedings against those in the cybersecurity space. The SEC has asserted the opinion that most, if not all, cryptocurrencies are securities; the CFTC has found them to be commodities; the IRS’s official definition is the same as the CFTC, and in particular a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, and now the Financial Crime Enforcement Network (FinCEN) has asserted that issuers of cryptocurrencies are money transmitters.
In particular, in a letter written to the US Senate Committee on Finance on February 13, 2018, FinCEN indicates that it expects issuers of initial coin offerings (ICOs) to comply with the Bank Secrecy Act (BSA), including its anti-money laundering (AML) and know your customer (KYC)
The SEC Has Provided Guidance On Ether and Bitcoin, Sort Of
On June 14, 2018, William Hinman, the Director of the SEC Division of Corporation Finance, gave a speech at Yahoo Finance’s All Markets Summit in which he made two huge revelations for the crypto marketplace. The first is that he believes a cryptocurrency issued in a securities offering could later be purchased and sold in transactions not subject to the securities laws. The second is that Ether and Bitcoin are not currently securities. Also, for the first time, Hinman gives the marketplace guidance on how to structure a token or coin such that it might not be a security.
While this gives the marketplace much-needed guidance on the topic, a speech by an executive with the SEC has no legal force. As a result, the blogs and press responding to Mr. Hinman’s speech have been mixed. Personally, I think it is a significant advancement in the regulatory uncertainty surrounding the crypto space and a signal that more constructive guidance
SEC Continues to Review, And Delay, Crypto Funds
On January 18, 2018, the SEC issued a letter to the Investment Company Institute and the Securities Industry and Financial Markets Association (SIFMA) explaining why the SEC could not approve a cryptocurrency-related exchange traded fund (ETF) or mutual fund. The letter, authored by SEC Division of Investment Management director Dalia Blass, explains the SEC’s reservations and concerns about approving a crypto-related mutual fund or ETF. The letter advised against seeking registration of funds that invest heavily in cryptocurrency-related products until the raised questions and concerns can be properly addressed.
The SEC letter comes a year after the SEC rejected a proposal by Cameron and Tyler Winklevoss, famously linked to the founding of Facebook, to create a bitcoin-tracking ETF. Since that time the SEC has privately rejected several similar requests. Many in the industry appreciate the SEC letter as it offers specific guidance and concrete issues to be addressed as the march towards the eventual approval of a crypto-related fund
