According to a 2023 survey conducted by Coinbase, around 20% of the American population, equivalent to over 50 million individuals, are crypto owners, contributing to a market valued in the billions. This positions the United States as one of the largest and most impactful digital asset markets globally, showing no signs of deceleration amidst the continuous emergence of new blockchain applications, digital assets, and regulatory shifts.
Multiple Regulatory Entities in the United States, various regulatory bodies monitor the digital asset space. The Securities Exchange Commission (“SEC”) holds authority over digital assets categorized as securities, including security token offerings (“STOs”). The Commodities Futures Trading Commission (“CFTC”) oversees digital assets classified as commodities. Additionally, the Financial Crimes Enforcement Network (“FinCEN”) plays a pivotal role in upholding Anti-Money Laundering (“AML”) and Know Your Customer (“KYC”) regulations for both digital assets and the exchanges facilitating them.
Under the purview of U.S. federal securities laws, a digital asset assumes the classification of a “security” subject to the Securities Act of 1933 and the Securities Exchange Act of 1934 if it qualifies as an “investment contract” under the four-part test delineated by the U.S. Supreme Court in SEC v. W.J. Howey Co. (1946) – commonly known as the Howey Test. A regulated investment contract emerges when there is an investment of money in a common enterprise, with an expectation of profit relying on the efforts of others.
The Securities and Exchange Commission (SEC) initially applied the Howey Test to digital assets in 2017. The SEC’s stance became apparent in December 2017 when Munchee Inc.’s ICO was deemed subject to regulation, signaling that even utility tokens could be viewed as investment contracts if they generated an expectation of profit. The SEC reiterated this position in its “Framework for Investment Contract Analysis of Digital Assets” (2019 Framework), shedding light on factors influencing the determination of a purchaser’s reasonable expectation of profits derived from others’ efforts. This involves assessing the significance and managerial nature of third-party efforts and the purchaser’s anticipation of profits resulting from the development of the initial investment or business enterprise.
Despite the SEC’s outlined factors, Chairman Gary Gensler’s recent assertion that most digital assets are securities has sparked debate. Gensler argues that the fundraising nature of crypto tokens aligns with investment contracts or securities, contrary to the viewpoint expressed by former SEC Director Bill Hinman in 2018 regarding Bitcoin and Ether’s non-securities status due to their decentralized nature.
This divergence of opinions is now being tested in the U.S. District Court for the Southern District of New York, where the court has ordered the disclosure of internal SEC correspondence (Hinman Documents).
The U.S. Commodity Futures Trading Commission (CFTC) is also challenging the SEC’s jurisdiction over digital assets, affirming that Bitcoin and Ether are commodities under CFTC oversight.
In Congress, Senators Lummis and Gillibrand are crafting bipartisan legislation proposing a comprehensive regulatory framework for digital assets, with the CFTC taking a prominent oversight role. Senator Stabenow has introduced a bill to grant the CFTC extensive jurisdiction over digital assets. In the House, a bipartisan group has presented legislation for CFTC-regulated digital commodity exchanges, with various bills and resolutions on digital asset regulation introduced in Congress. The evolving landscape suggests ongoing deliberations and potential regulatory shifts in the digital asset sphere.
Here is an update on the ongoing discussions and developments related to the regulation of digital assets in the United States:
Senators Lummis and Gillibrand’s bipartisan bill, formally known as the “Responsible Financial Innovation Act,” is still in the drafting process. The bill aims to establish a comprehensive regulatory framework for digital assets, with the Commodity Futures Trading Commission (CFTC) taking the primary role in overseeing the spot and derivatives markets for digital assets. The bill is expected to be introduced in the coming months.
Senator Stabenow’s bill, titled the “Digital Commodity Exchange Act,” would grant the CFTC explicit authority to regulate digital asset exchanges as designated contract markets (DCMs) and swap execution facilities (SEFs). The bill also proposes to establish a new category of “digital commodity broker-dealers” that would be subject to CFTC oversight. The bill has been introduced in the Senate but has not yet been scheduled for a vote.
Several bipartisan bills and resolutions related to digital asset regulation have been introduced in the House of Representatives. These include bills to create a new digital assets regulator, to establish a pilot program for digital asset trading platforms, and to provide tax clarity for digital asset transactions. The House is expected to continue to consider these proposals in the coming months.
Here are some additional points to consider:
In a move towards streamlining the regulation of digital assets, the proposed Digital Trading Clarity Act seeks to bring clarity to two major concerns affecting crypto exchange establishments: (i) the categorization of digital assets; and (ii) associated liabilities under existing securities laws. If a federal court, through a final judgment or the SEC via formal rulemaking or enforcement action, determines a digital asset as a security, the bill mandates the SEC Division of Examinations to seek information from an intermediary listing that asset to assess compliance with the bill’s requirements. If compliant, a two-year “compliance period” ensues, during which the intermediary faces no enforcement actions related to listing or failure to register.
In July 2023, an updated iteration of the RFIA, initially introduced in 2022, aims to establish a definitive regulatory framework for distinguishing crypto assets as securities or commodities. The RFIA grants exclusive jurisdiction to the CFTC over a crypto token qualifying as an ancillary asset but not a “security that constitutes an investment contract.” To meet ancillary asset criteria, the token must not confer financial rights, such as debt or equity, to the holder. However, the SEC retains a role: if the daily aggregate value of transactions surpasses a specified threshold and the issuer significantly influences the ancillary asset’s value, detailed disclosures must be filed with the SEC.
Similarly, the McHenry-Thompson Bill confers primary jurisdiction over digital asset markets to the CFTC while outlining a process for allocating oversight between the SEC and CFTC. A digital asset is deemed a “digital commodity” and falls under CFTC regulation if its associated blockchain network is both “functional” and certified as “decentralized.”
Certification of a digital commodity’s status can be performed by any person, with networks presumed decentralized unless the SEC objects within 30 days, providing detailed analysis for objection. The SEC governs “restricted digital assets,” involving assets held by issuers or affiliates before network functionality and certification as decentralized or held by non-issuers unless distributed through an “end user distribution” or acquired on a CFTC-regulated exchange. In response to the Ripple decision, bipartisan congressional members urged the SEC to reconsider its approach, potentially prompting legislative action if legal ambiguities persist due to court rulings against the SEC, as seen in cases like Terraform.
Regulation A is an exemption from registration under the Securities Act of 1933 that allows companies to offer and sell securities to the public, but with more limited disclosure requirements than what is required for publicly reporting companies. This can make it a more cost-effective way for companies to raise capital, especially for smaller companies and startups.
There are two tiers of Regulation A:
There are several benefits to using Regulation A to raise capital, including:
There are certain eligibility requirements for companies that want to use Regulation A to raise capital. These requirements include:
The process for using Regulation A to raise capital is as follows:
Regulation D is a set of rules under the Securities Act of 1933 that exempts certain offerings of securities from registration with the Securities and Exchange Commission (SEC). This means that companies can offer and sell securities to investors without having to go through the full registration process, which can be expensive and time-consuming.
The purpose of Regulation D is to provide a mechanism for companies to raise capital from a limited number of investors without having to bear the full costs of registration. This can be helpful for smaller companies or companies that are not yet ready to go public.
There are three main types of Regulation D offerings:
All Regulation D offerings must meet certain general requirements, including:
In addition to the general requirements, Rule 506 offerings must also meet certain additional requirements, including:
There are several benefits to using Regulation D to raise capital, including:
Overall, the regulatory landscape for digital assets in the United States remains fluid and evolving. There is a growing consensus in Congress that some form of regulation is necessary to protect investors and promote market integrity. However, there is still debate about the specific form that regulation should take.
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